AI, ex-China Flows Reshape Emerging Markets ETF Market

Emerging markets ETFs attracted $38 billion in net inflows in the first half of 2026 as funds tied to artificial intelligence and concentrated in Taiwan and South Korea outperformed, according to State Street Investment Management data. The iShares MSCI Emerging Markets ex China ETF (EMXC) returned about 34% year-to-date.

State Street data show H1 inflows exceeded the full-year 2025 total of $35 billion. About 73% of emerging markets ETFs recorded net inflows in the period. Investors allocated to broad, low-cost products as well as to targeted funds emphasizing hardware that supports AI, including advanced memory chips and high-bandwidth storage, much of which is produced in emerging market manufacturing centers.

Top-performing emerging markets ETFs have significant weights in Taiwan and South Korea. EMXC, which excludes China, allocates roughly 28% to Taiwan and 22% to South Korea and held $24.6 billion in assets at midyear. Columbia’s EM Core ex-China ETF (XCEM) listed similar gains while offering a lower expense ratio. The iShares Core MSCI Emerging Markets ETF (IEMG), which retains about 18% exposure to China and also has heavy Taiwan and South Korea exposure, is up about 18% year-to-date and had roughly $154 billion in assets. The Vanguard Emerging Markets ETF (VWO) has gained about 9% in 2026, reflecting its exclusion of South Korea and a larger China weight near 27%.

In a market outlook, Citi described China’s economy as “K-shaped,” noting that “AI-related manufacturing continues to accelerate” while consumption and property markets remain weak. The firm said equities tied to AI and the new economy should continue to benefit from concentrated nominal growth even as other sectors struggle.

Valuation differences have supported interest in emerging markets. The trailing price-to-earnings ratio for IEMG is about 19.8 compared with 30.5 for a large-cap U.S. S&P 500 ETF, leaving an emerging market discount above 33%, higher than the historical range of roughly 20% to 30%. The Avantis Emerging Markets Equity ETF (AVEM), which screens for lower valuations and higher profitability, is up more than 20% year-to-date and held about 19% of its portfolio in China; AVEM reported roughly $25 billion in assets.

Performance across the EM ETF category has been uneven. Some ex-China products have gained more than 30% year-to-date, while other strategies are flat or slightly negative. Differences in country exposure, single-stock weightings and index methodology account for much of the dispersion.

Macro factors could influence outcomes in the second half of the year. Major banks expect the Federal Reserve to keep policy rates on hold, while market pricing is split on the likelihood of a rate hike before year-end. Higher U.S. rates and a stronger dollar have historically raised borrowing costs and pressured capital flows to emerging markets, though several EM economies have lower debt loads and have benefited from earnings tied to AI-related exports.

Seasonal patterns in the MSCI Emerging Markets Index show late summer and early autumn are typically weaker periods for EM equities. Investors continue to allocate across a wide range of EM ETFs offered by major managers, with product selection linked to specific investment goals and risk tolerances.