The Part of Your Portfolio You Might Be Ignoring Right Now

There’s a good chance your eyes go straight to the S&P 500 every time you check your portfolio. That’s understandable. For years, U.S. stocks were the easy win. But 2025 quietly flipped the script, and a lot of investors missed it.

Emerging markets, the part of the world most people treat as a footnote, returned 33.6% last year. The S&P 500 returned 17.9%. MSCI World came in at 21.6%. Emerging markets beat them both, by a wide margin, and most headlines barely mentioned it.¹

That’s worth slowing down on.

Few Saw Taiwan Coming. That’s Kind of the Point.

In the twelve months ending June 2026, Taiwan’s stock market surged 104%. South Korea climbed 181%. Taiwan moved from the fifth largest market in the world to third, leapfrogging the UK. South Korea jumped to sixth.²

We can assume that few had those countries circled on their whiteboard heading into 2025. Research consistently shows that the majority of actively managed funds underperform their benchmarks after fees over time, in part because consistently identifying the next market leader before it moves is extraordinarily difficult. Markets surprise. That tendency isn’t a flaw in the system. It’s how markets work.

The Dimensional research team put it plainly: strong outcomes can emerge from anywhere in the world. History backs that up. Among the ten largest emerging market countries, annual return spreads in recent years have ranged from roughly 24% on the low end to around 93% on the high end.³ At the same time, other emerging market countries produced significantly lower returns, illustrating the wide dispersion that exists within the asset class. The gap between the leaders and the laggards is enormous, and identifying the leaders in advance consistently is close to impossible.

That’s the argument for broad diversification, not as a fallback, but as an actual strategy.

Exhibit 1: Country Market Cap Ranking

June 2025–June 2026

Where Things Stand Now

Emerging markets as a group represent more than 37% of publicly listed companies globally, yet they account for just over 11% of global market capitalization.³ That gap has historically been one of the reasons the asset class has attracted long-term investors looking at valuation discounts relative to U.S. equities.

In 2025, emerging market companies delivered approximately 16% earnings growth.¹ Inflation across the asset class, excluding China, fell from roughly 8.2% in early 2024 to around 6.1% by late 2025, continuing a multi-year decline from post-pandemic highs.⁴

Despite the strong 2025 performance, according to State Street Global Advisors, institutional data suggests many global investors remain underweight emerging markets relative to historical norms.¹

What This Means If You’re Approaching Retirement

For pre-retirees, the emerging markets story isn’t a call to concentrate into one region or chase last year’s returns. It’s actually the opposite point. The countries that led in 2025 and into 2026 were not the obvious picks. They may not lead next year. Something entirely different could.

The practical question isn’t which country to invest in. It’s whether your portfolio has the exposure to benefit when those moments happen, wherever they show up.

Investors with exposure to emerging markets generally participated in the asset class’s strong performance during the period. Portfolios with little or no international allocation may have had less participation in those gains. This is one reason diversification across geographies is often part of a long-term investment strategy, independent of any single year’s results.

A few things worth considering as you think through your own allocation:

Valuations still look different.

Emerging market equities continue to trade at a meaningful discount to U.S. stocks by most standard measures. That gap doesn’t guarantee outperformance, but it’s part of the context.³

The index itself has shifted.

China’s share of the MSCI Emerging Markets Index has dropped from around 40% in late 2020 to approximately 25% today.³ The composition is more diversified than many investors realize.

The case isn’t about excitement.

Emerging markets carry real risks, including currency volatility, geopolitical exposure, and liquidity considerations that differ from domestic markets. The argument for inclusion isn’t that they’ll always win. It’s that you can’t reliably predict when and where markets will move, so removing yourself from the opportunity entirely may cost you more than the volatility would have.

The Takeaway

Last year’s story out of Taiwan and South Korea wasn’t about those countries specifically. It was a reminder that the global economy has a lot of players, and history has repeatedly rewarded investors who stayed in the game everywhere, not just at home.

Periodic reviews of asset allocation remain important regardless of recent market performance. If you haven’t revisited your international allocation in a while, that conversation is worth having — not to chase what already happened, but to make sure your overall approach still reflects your goals, timeline, and risk tolerance.

We’re happy to walk through this with you. Reach out anytime.

This content is for informational purposes only and does not constitute investment advice. Investments in emerging markets are subject to greater volatility and may experience substantial declines in value. Risks include political and economic instability, currency fluctuations, differing accounting and regulatory standards, limited liquidity, and heightened geopolitical risks, among others. Past performance is not indicative of future results. Please consult with a qualified financial advisor before making investment decisions.

Sources:

1. State Street Global Advisors, Emerging Market Equities Outlook Q1 2026 — ssga.com[AG1] 
2. Dimensional Fund Advisors, An Emerging Markets Knockout — dimensional.com
3. Avantis Investors, The State of Emerging Markets in 2026 — avantisinvestors.com
4. Lazard Asset Management, Emerging Markets Outlook 2026 — lazardassetmanagement.com

All data points reflect historical or reported figures as of the dates cited. No forward-looking projections are represented in this content.

Index Definitions

S&P 500 Index: A market-capitalization-weighted index of 500 large U.S. companies, widely used as a benchmark for U.S. large-cap equity performance.

MSCI Emerging Markets Index: Tracks large and mid-cap equity performance across 24 emerging market countries, including China, Taiwan, South Korea, India, and Brazil. Returns reflect net dividends.

MSCI World Index: Captures large and mid-cap equity performance across 23 developed market countries, including the United States. Returns reflect net dividends.

Indices are unmanaged and not available for direct investment. Index returns do not reflect fees, expenses, or transaction costs.