Part of this is determined by experience. Many younger investors didn’t spend money on the so-called “lost decade” from the early 2000s to the top of the worldwide financial crisis. According to Dimensional Fund Advisors, the S&P 500 delivered negative annual returns during this era. In contrast, areas reminiscent of US small caps, value stocks, international stocks and emerging markets performed significantly higher.
From the turn of the last decade to the post-COVID economic turnaround, the other was true. US stocks, driven by mega-cap technology and growth corporations, dominated global markets. This has shaped the way in which many investors take into consideration diversification today.
After underperforming for greater than a decade, emerging markets now look like regaining some momentum. In 2024 and 2025, the iShares Core MSCI Emerging Markets IMI Index ETF (XEC) returned 25.34% in Canadian dollars. During the identical period, the iShares Core S&P 500 Index ETF was developed (XUS) returned 12.06%. Such a performance gap naturally attracts attention. Nothing prompts investors to reevaluate their allocations like recent returns.
At the identical time, emerging markets are nothing latest. They have long been a central a part of diversified portfolios. If you are investing in an asset allocation ETF, you most likely have already got some exposure.
However, in the event you’re constructing your personal portfolio, selecting a fund named “Emerging Markets” is not really easy. There are significant differences in how these ETFs are constructed, what they really contain, and the risks they pose. Here are a number of the nuances Canadian investors should listen to.
What counts as an emerging market just isn’t at all times clear
At a high level, emerging markets are countries that lie between developing and fully developed economies. They are inclined to have faster growth potential, a growing middle class and improved capital markets, but in addition involve higher political, currency and governance risks.
This general definition is usually accepted. The first differences are how index providers classify individual countries. You need to know how the benchmark provider defines what is taken into account “emerging” and “developed,” as these decisions have a direct impact on what you ultimately own.
Take the XEC mentioned above for instance. As of April 2026, country exposure includes, in descending order, 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). The largest exposures include China, Taiwan, India, Brazil, South Africa, Saudi Arabia, Mexico, Malaysia, Thailand and the United Arab Emirates.
Note what’s missing from VEE that’s present in XEC: South Korea. The difference lies within the index methodology. MSCI, which underlies XEC, classifies South Korea as an emerging market. FTSE, which Vanguard follows, classifies it as a developed market.
As a result, South Korea accounts for about 17.19% of XEC’s portfolio, with major holdings reminiscent of Samsung Electronics and SK Hynix, while it just isn’t represented in any respect on VEE. This is a meaningful shift in engagement, particularly given South Korea’s role in global technology supply chains. (Investors who own international developed market ETFs can even face the same situation.)
There isn’t any have to take a transparent stance on whether South Korea must be considered a developed or emerging country. Even major index providers disagree. The key takeaway is that the label on the ETF doesn’t tell the entire story. You have to take a more in-depth have a look at country weights and index rules to know what you might be actually buying.
Investors often underestimate the volatility in emerging markets
When it involves newer investors, it is obvious that many could also be overestimating their risk tolerance. Markets have experienced shocks lately, but lots of them were either short-lived or quickly reversed.
The COVID crash in March 2020 recovered quickly. The 2022 bear market was more protracted but still relatively flat by historical standards, even though it felt even worse because bonds were falling in tandem with stocks.
For many investors, especially those that have recently began investing, the danger of prolonged losses has been limited. This can shape expectations. It just isn’t unusual for portfolios to be constructed of 100% stocks and to assume that markets will trend upward over time. While that is broadly true over the long run, performance could be volatile, and these fluctuations turn out to be more noticeable as portfolio values increase.
One option to quantify that is standard deviation, which measures how much the return tends to fluctuate around its average. The next standard deviation means larger and more frequent fluctuations in value.
