What’s driving interest in emerging markets?

By Vanguard

Markets and economy

Growth, innovation and diversification are lifting interest in emerging markets

If you’ve been looking at asset class returns over the past year, you may have noticed or heard about the strong performance of emerging markets shares. But what are they, and what’s driving interest in them?

Emerging markets refer to listed companies in developing nations including China, Taiwan and India. While some investors are attracted to these countries because they offer relatively high economic and earnings growth potential, they can be riskier and more volatile relative to developed markets.

In the year to February 2026, the Vanguard FTSE Emerging Markets Shares ETF (VGE) returned 15.64%, compared to 16.38% for the Vanguard Australian Shares Index ETF (VAS) and 2.13% for the Vanguard U.S. Total Market Shares Index ETF (VTS)¹.

 

What’s driving their performance?

There are a number of factors to unpack when it comes to what’s driving the impressive performance of emerging markets.

 

1. Stronger economic growth

The first is their growth potential. Emerging economies are generally expanding faster than their developed counterparts due to factors including industrialisation and urbanisation, which support rising incomes.

For example, China’s economy is expected to grow 4.5% this year, compared to 2.25% for the US and just 1.2% in Europe². A swelling middle-class population boosts demand across sectors including financial services and e-commerce.

 

2. Increasing role in innovation

The second is that emerging markets are no longer viewed simply as manufacturing hubs for mass-produced goods, but are increasingly moving up the value chain and competing in a broader range of higher-value industries.

Companies like Taiwan Semiconductor Manufacturing Co (TSMC) operate the factories that create advanced chips critical to the artificial intelligence (AI) boom and supply essential components that power products like iPhones.

Meanwhile, China is rapidly growing its research and development (R&D) spending, investing nearly US$1 trillion³ to become a key player in areas such as robotics, clean energy and electric vehicle manufacturing.

 

3. Relative valuations

Emerging market equities have historically traded at a valuation discount to developed markets, and that remains the case today. The portfolio holdings within the Vanguard FTSE Emerging Markets Shares ETF (VGE) trade on an average price/earnings ratio of 17.1x, versus 22.4x for the Vanguard Australian Shares Index ETF (VAS) and 26.9x for the Vanguard US Total Market Shares Index ETF (VTS)⁴.

 

4. Currency and the global repositioning

Emerging markets can also benefit from shifts in global capital flows. When the US dollar weakens, investors often look beyond the US for returns.

Concerns around US trade policies have also driven what’s known as the “ex-US trade”, where investors are diversifying into other regions, with emerging markets benefiting from increased attention.

This shift is also showing up in Australian ETF flows, with the Vanguard FTSE Emerging Markets Shares ETF (VGE) attracting average quarterly inflows of $85.6 million in 2025, rising to $139.7 million in the first quarter of 2026⁵.

 

How should investors think about emerging markets?

While the long-term growth story for emerging markets remains compelling, they are not without risks. Political and regulatory risks vary significantly between countries and may contribute to higher volatility. For these reasons, emerging markets are typically considered as part of a diversified portfolio rather than a standalone investment.

Market leadership can also change over time. In the 2000s, emerging markets and Australian equities delivered strong performance, while growth-oriented US equities led much of the 2010s. More recently, global value stocks have garnered significant attention.

 

The bottom line

Interest in emerging markets has been supported by factors including their growth potential and a shift away from US assets. However, as with any investment, it all depends on an investor’s individual goals, risk tolerance and time horizon.

For most investors, maintaining a diversified portfolio of assets across regions and asset classes, along with a long-term outlook, remains a reliable way to navigate cycles and grow wealth.

 

1. ^{Vanguard is the issuer of the Prospectus on behalf of the U.S. listed exchange traded funds (“ETFs”) described in the Prospectus. Vanguard has arranged for interests in the U.S. ​​​​​​​ ETFs to be made available to Australian investors via CHESS Depositary Interests that are quoted on the AQUA market of the Australian Securities Exchange (“ASX”).}
2. ^{Vanguard’s economic and market outlook for 2026, December 2025}
3. ^{OECD Main Science and Technology Indicators, March 2025}
4. ^{Vanguard FTSE Emerging Markets Shares ETF (VGE), Vanguard Australian Shares Index ETF (VAS) and Vanguard US Total Market Shares ETF (VTS) Factsheets, February 2026}
5. ^{Vanguard internal data}