What is an emerging market, and why should you invest in them?

While there isn’t a single definition of an emerging market, the phrase usually refers to economies that are transitioning from being relatively undeveloped towards being a fully-fledged post-industrial economy with high standards of living.

Investing in them can offer diversification away from developed regions like the US or the UK, where your portfolio may well have a lot of exposure by default, whilst still tapping into key themes like artificial intelligence (AI).

We take a closer look at which countries are designated as emerging markets and why, and how you can invest in them.

Start your trial of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

Sign up for MoneyWeek’s free twice-daily newsletter.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Sign up

Which countries are emerging markets?

The closest thing to a universal definition of an emerging market is probably the International Monetary Fund’s ‘emerging market and middle-income’ classification, which applies to 40 countries. Some of the largest and most significant economies on this list are Brazil, Russia, India, China and South Africa, which collectively make up the ‘BRICS’ nations.

But for investors, a more relevant categorisation is MSCI, which divides national economies into five categories: developed, emerging, frontier, advanced frontier, and standalone markets. MSCI counts the following as emerging market economies:

MSCI’s classification is not the only one and different providers might designate countries differently from one another.

There is also the scope for countries to move between categories. Vietnam, for example, was reclassified by FTSE Russell from a ‘frontier’ market to a ‘secondary emerging’ market in a process beginning September 2026.

What are the characteristics of emerging markets?

While every emerging market is different (just as every country is different), the economic trajectory of emerging markets tends to lead to some general themes that are of interest to investors.

One of these is relatively fast economic growth rates. These countries tend to be increasing their standard of living, often from a relatively low starting point, and that leads to high growth rates in terms of year-on-year percentages.

That often goes hand-in-hand with improving financial infrastructure. India, for example, has gone from a predominantly cash-based economy to the world’s largest digital payments market in less than a decade, thanks largely to investment in the unified payments interface (UPI) technology that underpins the country’s payments network.

Emerging markets also tend to have younger populations relative to developed economies, and often have rapidly improving standards of education.

Particular emerging markets can offer you exposure to large structural trends, without compounding your exposure to developed markets.

“South Korean and Taiwanese markets have both been lifted by the AI boom due to increased demand for semiconductors and memory chips,” said Omar Negyal, manager of JPMorgan Emerging Markets Dividend Income Trust. Similarly, he added, “companies across Latin America have been supported by stronger commodity prices and increased demand for energy and resources.”

Why invest in emerging markets?

The main rationale for investing in emerging markets is that they provide diversification. Given the prominence of global tracker funds and the dominance of US-based tech stocks, your portfolio may well be heavily weighted towards developed market (especially US) stocks, and investing in emerging markets can give you exposure to an alternative set of growth drivers and risk factors.

Be aware though that a broad-based emerging market allocation doesn’t guarantee this by itself. Some of the largest emerging market stocks (particularly Taiwan Semiconductor, SK Hynix and Samsung Electronics) are artificial intelligence hardware makers, and as such are closely correlated with US big tech stocks.

However, individual countries can offer this kind of diversification. India, for example, can be seen as an ‘anti-AI trade’ given it doesn’t have the level of exposure to the semiconductor that countries like Taiwan or South Korea do.

What are the risks of investing in emerging markets?

Many of the upsides of investing in emerging markets also come with additional risk compared to developed markets.

They can be impacted by geopolitical factors, such as the trade frictions that have existed between the US and China over recent years, while fluctuations in exchange rates can be challenging for emerging economies. The war in Iran has been a substantial headwind for emerging markets given its impact on oil prices, with many emerging markets (particularly in East Asia) reliant on oil imports.

Some emerging markets also have weaker corporate governance provisions compared to developed markets, which can increase risks for investors.

And similarly, the structural trends that are currently benefitting emerging markets could hinder them should they reverse.

“Any sharp reversal in the AI theme may lead to underperformance of tech-heavy markets like Taiwan and Korea,” said Hiren Dasani, chief investment officer at Ashoka WhiteOak Emerging Markets Trust.

How to invest in emerging markets

If you are considering investing in emerging markets, there are several ways to go about it.

You could choose a low-cost index fund that passively tracks an index. For example:

• iShares MSCI Emerging Markets ETF (LON:0JHF) which tracks the MSCI Emerging Markets Index
• Vanguard FTSE Emerging Markets ETF (LON:0LMP) which tracks the FTSE Emerging Markets All Cap China A Inclusion Index

For a more active approach, investors could select an emerging markets-focused investment trust such as Templeton Emerging Markets Investment Trust (LON:TEM) or Ashoka WhiteOak Emerging Markets Trust (LON:AWEM), both of which invest in long-term opportunities in emerging market economies.

Fidelity Emerging Markets Limited (LON:FEML) can invest up to 30% of its portfolio in short positions, typically when a business operates in a sector that is experiencing a structural decline and there is some sort of governance issue surrounding the company, giving the fund’s managers greater flexibility in how they approach emerging markets.

JPMorgan Emerging Markets Dividend Income Trust (LON:JEMI) and Utilico Emerging Markets Trust (LON:UEM) are emerging market investment trusts that focus on dividend stocks in emerging markets; UEM is a next-generation dividend hero, having raised its dividend payout for 10 consecutive years.