Part of this comes down to experience. Many younger investors did not invest through the so-called “lost decade,” from the early 2000s through the tail end of the global financial crisis. According to Dimensional Fund Advisors, the S&P 500 delivered negative annual returns over that stretch. In contrast, areas like U.S. small caps, value stocks, international equities, and emerging markets significantly outperformed.
From the turn of the decade through the post-COVID stimulus era, the opposite played out. U.S. equities, driven by mega-cap technology and growth companies, dominated global markets. That has shaped how many investors think about diversification today.
Now, after underperforming for more than a decade, emerging markets appear to be gaining some momentum again. Over 2024 and 2025, the iShares Core MSCI Emerging Markets IMI Index ETF (XEC) returned 25.34% in Canadian-dollar terms. Over the same period, the iShares Core S&P 500 Index ETF (XUS) returned 12.06%. That kind of performance gap naturally attracts attention. Nothing prompts investors to reassess their allocations quite like recent returns.
At the same time, emerging markets are not new. They have long been a core component of diversified portfolios. If you are invested in an asset-allocation ETF, you likely already have some exposure.
But if you are building your own portfolio, it is not as simple as picking a fund with “emerging markets” in the name. There are meaningful differences in how these ETFs are constructed, what they actually hold, and the risks they introduce. Here are some of the nuances Canadian investors should watch out for.
What counts as an emerging market isn’t always clear
At a high level, emerging markets are countries that sit between developing and fully developed economies. They tend to have faster growth potential, expanding middle classes, and improving capital markets, but also come with higher political, currency, and governance risks.
That general definition is widely accepted. Where things start to differ is in how index providers classify individual countries. You need to understand how the benchmark provider defines what qualifies as “emerging” versus “developed,” because those decisions directly affect what you end up owning.
Take the above mentioned XEC as an example. As of April 2026, its country exposure in descending order includes, but is not limited to, Taiwan, China, South Korea, India, Brazil, South Africa, Saudi Arabia, Mexico, Malaysia, the United Arab Emirates, Thailand, and Poland.
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Now compare that to the Vanguard FTSE Emerging Markets All Cap Index ETF (VEE). Its top exposures from largest to smallest include China, Taiwan, India, Brazil, South Africa, Saudi Arabia, Mexico, Malaysia, Thailand, and the United Arab Emirates.
Notice what is missing from VEE that is present in XEC: South Korea. The difference comes down to index methodology. MSCI, which underpins XEC, classifies South Korea as an emerging market. FTSE, which Vanguard follows, classifies it as a developed market.
As a result, South Korea makes up about 17.19% of XEC’s portfolio, with major holdings like Samsung Electronics and SK Hynix, while it is entirely absent from VEE. That is a meaningful shift in exposure, particularly given South Korea’s role in global technology supply chains. (Investors owning international developed-market ETFs will face a similar situation as well.)
There is no need to take a firm stance on whether South Korea should be considered developed or emerging. Even major index providers disagree. The key takeaway is that the label on the ETF does not tell the full story. You need to look under the hood at country weights and index rules to understand what you are actually buying.
Investors often underestimate emerging-market volatility
On the topic of newer investors, one observation worth making is that many may be overestimating their risk tolerance. Over the past several years, markets have experienced shocks, but many of them were either short-lived or quickly reversed.
The March 2020 COVID crash rebounded rapidly. The 2022 bear market was more drawn out, but still relatively shallow by historical standards, even if it felt worse due to bonds declining alongside stocks.
For many investors, especially those who started investing more recently, there has been limited exposure to prolonged drawdowns. That can shape expectations. It is not uncommon to see portfolios built around 100% equities under the assumption that markets will trend upward over time. While that is broadly true over long horizons, the path can be volatile, and those swings become more noticeable as portfolio values grow.
One way to quantify this is through standard deviation, which measures how much returns tend to vary around their average. Higher standard deviation means larger and more frequent swings in value.
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