Rethinking Emerging Markets: Why Passive Indexing May No Longer Be the Best Strategy

Investors are being urged to move beyond broad-market indices when looking at emerging markets (EM), as the traditional winners of the sector are being reshuffled. While the MSCI Emerging Markets index is up 22% this year—doubling the performance of many developed benchmarks—the concentration of gains has become a risk factor. Much like the U.S. market's reliance on tech, the EM index has become heavily skewed toward a few regions and sectors.

Strategic analysts suggest that a 'broad index' approach no longer provides the diversification benefits that investors seek from international holdings. Factors such as geopolitical tensions, varying interest rate cycles in different developing nations, and the localized impact of commodity prices are creating a divergent landscape. For instance, while some resource-rich Latin American markets are thriving, others are struggling with idiosyncratic political risks.

The recommendation from wealth managers is a more granular, active approach to emerging markets. By picking specific countries or thematic winners rather than buying the whole basket, investors may be able to capture growth without the volatility associated with the index's largest components. This shift in strategy highlights a growing trend among institutional investors to treat emerging markets as a collection of distinct opportunities rather than a monolithic asset class.