Emerging market index funds offer UK investors a low-cost route into economies often associated with faster population and economic growth than the developed world, spanning countries such as China, India, Brazil, and Taiwan. They also carry a distinct risk profile that differs meaningfully from developed-market index funds, shaped by currency movements, political and regulatory factors, and market structure differences that do not apply in the same way to markets such as the US or UK. Understanding both sides of that trade-off is essential before considering emerging markets as part of a diversified portfolio.
What counts as an "emerging market"
Index providers such as MSCI and FTSE Russell maintain their own classification systems dividing the world's stock markets into developed, emerging, and sometimes frontier categories, based on criteria including market size, liquidity, and the ease with which foreign investors can access and trade local shares. These classifications are reviewed periodically and can change — a market can be reclassified from emerging to developed status, or occasionally the reverse, as its market infrastructure evolves.
Commonly included emerging markets in mainstream indices include China, India, Taiwan, South Korea (though South Korea's classification has varied across different index providers), Brazil, South Africa, and a range of other countries across Asia, Latin America, the Middle East, and Eastern Europe. The relative weightings of these countries within an emerging markets index shift over time in the same market-cap weighted manner as developed-market indices, meaning a country whose listed companies have grown substantially in value will see its share of the index rise, while a country experiencing a prolonged market downturn will see its weighting shrink, entirely independent of any active investment decision.
It is also worth noting that different index providers can classify the same country differently at any given time, and their published classification frameworks are reviewed on a regular schedule. A country sitting close to the boundary between "emerging" and "developed" status, or between "frontier" and "emerging" status, can see meaningful shifts in fund flows around the time of a reclassification announcement, as index-tracking funds adjust their holdings to match the revised benchmark composition. This is a structural, mechanical process rather than a judgement about the underlying economy's prospects, but it is one more reason why the composition of an "emerging markets" fund is worth checking periodically rather than assumed to be fixed.
Concentration within "emerging markets" as a category
Despite representing dozens of countries, mainstream emerging market indices are often heavily concentrated in a relatively small number of the largest constituent countries, commonly China, India, Taiwan, and South Korea together representing a substantial majority of the index. This means an "emerging markets fund" is not necessarily as broadly diversified across countries as its name might suggest, and a large allocation to any single dominant country can significantly influence the fund's overall behaviour.
The case for emerging market growth potential
The argument commonly made for emerging market exposure centres on demographic and economic trends: many emerging economies have historically shown faster GDP growth rates than developed economies, younger populations, and rising middle-class consumption. Over long time horizons, some investors consider this a case for including emerging markets as a distinct allocation within a diversified portfolio, on the view that economic growth may eventually be reflected in listed company performance, even though the relationship between a country's GDP growth and its stock market returns has not always been straightforward or reliable historically.
The additional risks specific to emerging markets
Currency risk
Emerging market currencies have historically shown greater volatility against major currencies such as the US dollar and British pound compared with developed-market currencies. For a UK investor, this currency volatility adds a further layer of variability on top of the underlying equity market movements, and most mainstream emerging market index funds do not hedge this currency exposure.
Political and regulatory risk
Emerging markets can be more exposed to sudden changes in government policy, regulation affecting foreign investors, capital controls, or broader political instability, any of which can affect listed companies and market access in ways less commonly seen in established developed-market democracies with longer track records of stable, predictable institutions.
Market structure and liquidity
Some emerging markets have less liquid stock markets, less mature regulatory oversight, or different disclosure and accounting standards compared with developed markets, all of which can affect how efficiently prices reflect available information and how easily large positions can be traded, particularly during periods of stress.
Concentration in specific sectors or state-linked companies
Certain emerging markets have historically shown significant weighting towards specific sectors, such as financials or energy, or towards large companies with significant state ownership or influence, which can introduce governance considerations distinct from those affecting typical developed-market companies.
Historical volatility in context
Emerging market equities have, over various historical periods, shown higher volatility than developed market equities, with larger swings in both directions over shorter time frames. This is a general, well-established pattern rather than a specific forecast, and it does not mean emerging markets always underperform or outperform developed markets over any given period — simply that the range of potential outcomes, in either direction, has tended to be wider.
A worked example
Suppose two hypothetical investors each allocate £10,000 to equities: Investor A places the full amount into a developed-market global tracker, while Investor B places £8,000 into the same developed-market tracker and £2,000 into a dedicated emerging markets index fund. Over any given period, Investor B's portfolio could show a different overall return than Investor A's, sometimes better and sometimes worse, depending on how emerging markets perform relative to developed markets over that specific stretch, and Investor B's portfolio would likely show somewhat greater volatility given the historically wider swings in emerging market returns. Neither outcome can be predicted in advance, and this example is illustrative only, intended to show how a partial emerging markets allocation changes a portfolio's risk and return characteristics rather than to suggest any particular allocation is preferable.
Ways UK investors commonly access emerging markets
| Approach | Description |
|---|---|
| Dedicated emerging markets index fund | A standalone fund tracking a benchmark such as the MSCI Emerging Markets Index, held alongside separate developed-market funds |
| All-country global index fund | A single fund, such as one tracking MSCI ACWI, which includes both developed and emerging markets in a single portfolio at market-cap weightings |
| Actively managed emerging markets fund | A fund where a manager selects specific countries or companies within emerging markets, rather than tracking an index, typically at a higher cost |
| Emerging market investment trusts | Closed-ended funds providing emerging market exposure, which can also use gearing and may trade at a discount or premium to net asset value |
Practical considerations for UK investors
- Check whether an "emerging markets" fund is heavily concentrated in a small number of dominant countries before assuming broad diversification across the category.
- Consider the ongoing charges figure carefully, since emerging market funds — both index and actively managed — often cost somewhat more than developed-market equivalents, reflecting higher administrative and trading costs in some of these markets.
- Be prepared for greater volatility than developed markets, and consider how a given emerging markets allocation fits with overall risk tolerance and time horizon.
- Consider whether an all-country global fund (which already includes some emerging market exposure) or a dedicated standalone emerging markets fund better matches the desired level of exposure.
- Remember that currency movements can meaningfully affect returns for a UK investor, in either direction, since most funds in this space are unhedged.
Emerging markets within a diversified portfolio
Many UK investors who choose to include emerging markets do so as a deliberate, sized allocation within a broader, diversified portfolio, rather than as a primary or sole equity holding, reflecting the additional volatility and risk factors described above. Others prefer to gain some emerging market exposure indirectly and more moderately through an all-country global tracker, which naturally reduces the emerging markets weighting relative to a standalone dedicated fund. Both approaches are commonly used, and the right balance, if any, depends on an individual investor's own risk tolerance, time horizon, and broader portfolio construction — considerations that are personal and not the subject of a single universal answer.
Tax treatment within a UK wrapper
As with any other fund, holding an emerging markets index fund within a Stocks and Shares ISA or a SIPP shelters income and gains from UK income tax, dividend tax, and capital gains tax, within the £20,000 combined annual ISA allowance or the £60,000 pension annual allowance (or 100% of earnings if lower) applicable for the 2025/26 tax year. Outside a wrapper, dividend income above the £500 annual dividend allowance and gains above the £3,000 capital gains tax annual exempt amount for 2025/26 can potentially be taxable, with CGT charged at 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers on gains above the exempt amount. Given that emerging market funds can, over time, generate larger swings in value than developed-market holdings, investors managing gains outside a tax wrapper may find it particularly useful to keep a close eye on the annual exempt amount when considering when to realise any gains, though this is a general point of principle rather than personalised guidance, and current HMRC figures should always be checked.
Key takeaways
- Emerging market index funds provide exposure to economies such as China, India, Brazil, and Taiwan, based on index provider classifications that can change over time.
- These funds are often concentrated in a handful of the largest constituent countries, despite representing dozens of markets in total.
- Additional risks specific to emerging markets include currency volatility, political and regulatory risk, and differences in market structure and liquidity compared with developed markets.
- Emerging markets have historically shown greater volatility than developed markets, with a wider range of possible outcomes in either direction.
- Investors can access emerging markets through a dedicated fund, through an all-country global tracker that includes them, or through actively managed or investment trust structures.
- Any emerging markets allocation is a personal decision depending on individual risk tolerance and time horizon, not a universally appropriate weighting.