CONTRIBUTORS
Marcus Weyerer, CFA
Director of ETF Investment Strategy EMEA
Franklin Templeton ETFs
Emerging markets have staged a striking comeback in 2025. After several years of mixed underperformance versus global and US equities, we see mounting evidence of a turning tide. Year-to-date, broad emerging markets are up 25.5% in US dollar terms, nearly double the S&P 500 Index’s 13% gain.1 This month, the MSCI Emerging Markets Net Total Return Index soared to a new all-time high—its first since February 2021. For comparison, the S&P 500 Index has notched roughly 160 records over the same period (not a typo: 160%!).2
Investors haven’t been waiting for news headlines to finally proclaim a new record for the US$9.6 trillion index. They’ve already taken action in anticipation, pouring US$45 billion into emerging markets debt and equities in August alone—the most in almost a year, according to the Institute of International Finance.3 A weaker US dollar underpins broad optimism, but we think there is far more to it.
China is leading the charge, with Chinese equities also rallying to their highest levels since the Evergrande crisis four years ago—symbolically timed in late August with the developer’s delisting from the Hong Kong Stock Exchange, closing a difficult chapter. Several other forces have contributed to this performance, including targeted fiscal support, the technology revolution and a gradual improvement in consumer confidence.
India is expected to continue posting strong growth rates, fuelled by domestic consumption and an ambitious reform agenda. While its markets are currently suffering through a period of muted sentiment linked to US tariff policy uncertainty, the country’s long-term prospects remain excellent, in our view.
Room to grow: number of all-time highs
Since 17 February 2021
Sources: Bloomberg, Franklin Templeton ETF Investment Strategy EMEA. As of September 2025. Numbers are based on Net Total Return indexes. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
South Korea has been a standout performer so far in 2025. Korean equities are up more than 55% in US dollar terms, and 46% in local currency (KRW).4 The expected extension of the semiconductor cycle, newfound stability after last year’s martial crisis and government reforms aimed at reducing the infamous “Korea Discount” are some of the reasons for increased investor appetite.
A weaker dollar underpins broad optimism for emerging markets
31/12/2024 – 15/09/2025
Source: Bloomberg. As of 15 September 2025. US Dollar Index year-to-date.
At Franklin Templeton, we are proponents of a disaggregation strategy, whereby investors recognize and appreciate the differences of individual emerging markets and allocate as such. Asia ex-China and emerging markets ex-China have generated a lot of investor attention over the past few years, not necessarily because of diminished interest in the market, but because China was seen as so large and so idiosyncratic that it required a nuanced and flexible approach. In this model, asset allocation and macroeconomic variables are assumed to be the primary drivers of returns and risk. We are also aware, of course, of the fact that not all investors have the resources to disaggregate their holdings and prefer a more traditional approach. This is absolutely feasible, but in these cases, we prefer to focus on company fundamentals. For such investors, a rules-based ETF strategy that considers the quality and value characteristics of its constituents may be a compelling option.
We believe that a thoughtful, rules-based combination of factors can add stability to the portfolio and enhance the probability of sustainable alpha generation. Our approach rests on four proven pillars: quality, value, momentum, and low volatility. Quality and value—both fundamental factors—account for 80% of the composite score, whereas momentum and low volatility account for 10% each.
A fundamental approach to investing in emerging markets; range and median
Source Bloomberg TLTS GO, Sept 2025. Date range is 15/09/2020-15/09/2025. Note that the scale for "valuation" is inverted. Indexes are the LibertyQ Emerging Markets NTR USD Index and the MSCI Emerging Markets NTR USD Index.
The top quartile of stocks in the universe (MSCI Emerging Markets) across these weighted factors are combined into a diversified portfolio. Beyond the stock selection, our approach also ensures diversification by capping each constituent at 1% at each rebalancing. This helps to control idiosyncratic, stock-specific risk and instead puts more emphasis on the aggregate factor tilts. The portfolio tends to display significantly better earnings and dividend yields, higher profitability, and slightly lower leverage, while deprioritizing growth names in favour of better valuations.
A fundamental approach displayed consistently lower volatility across market regimes
Source: Bloomberg. As of 12 September 2025
This conservative allocation can help smooth volatility and drawdowns and improve risk-adjusted returns. The rolling volatility of the strategy over 252 days has consistently been lower than its universe volatility, including during extreme market regimes like the COVID-19 pandemic, the Russian invasion of Ukraine in 2022 and the tariff panic earlier this year. At the same time, it achieved an excess return of 1.8% annualized over five years. Currently, the portfolio offers a discount of one-third in forward price-earnings (P/E) terms and price-to-book ratios, alongside a two-point dividend yield pickup (4.5% vs 2.5%).5
Source: Bloomberg. As of September 15, 2025. Maximum drawdown is calculated using return in period since 15 September 2019.
Investors who believe that the renaissance rally of emerging markets still has runway, the question is not simply whether to allocate, but how. A disaggregated approach can highlight the distinct opportunities and risks across markets such as China, India and South Korea—each driven by different policy, structural and cyclical forces. For those without the resources to implement such granular allocations, we believe a disciplined, rules-based strategy offers an effective alternative. By emphasizing quality and value fundamentals, while integrating momentum and low volatility factors, investors can potentially capture the breadth of EM growth potential with a more resilient profile.
We believe that this approach—anchored in factor discipline, diversified construction and valuation awareness—not only smooths volatility and mitigates drawdowns but also enhances the probability of generating sustainable excess returns. In a market environment where emerging economies are regaining leadership, thoughtful portfolio design is arguably more important than timing the opportunity.
EndNotes
- Source: As of September 12, 2025. Based on the MSCI Emerging Markets Net Total Return USD Index. The MSCI Emerging Markets Index captures large- and mid-cap representation across emerging markets countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
- Source: Bloomberg. As of September 2025.
- Source: Reuters. As of September 2025.
- Source: Bloomberg. As of September 2025.
- Source: Bloomberg. As of 15 September 2025
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
For actively managed ETFs, there is no guarantee that the manager’s investment decisions will produce the desired results.
ETFs trade like stocks, fluctuate in market value and may trade above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.
Commissions, management fees, brokerage fees and expenses may be associated with investments in ETFs. Please read the prospectus and ETF facts before investing. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated.