Why the index behind emerging market trackers matters

Investors buying a passive fund for exposure to global emerging markets could reasonably assume that one tracker is much like another. In this part of the market, that assumption can prove expensive.

The two most commonly followed benchmarks disagree fundamentally about one of the region’s largest markets. MSCI treats South Korea as an emerging market, and it accounted for 23% of its emerging market index at the end of June. FTSE reclassified South Korea as developed back in 2009, so it is absent from its emerging market index altogether. Because roughly a quarter of the index disappears, everything that remains is scaled up. As the end of June, the FTSE benchmark carried 33.5% in Taiwan against 27.3% for MSCI, 25.4% in China against 18.5%, and 15.9% in India against 11.2%.

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Two different exposures

Both approaches are represented among the passive ideas on interactive investor’s Highly Rated Funds tool, with both funds carrying a Bronze Morningstar Medalist Rating.

Fidelity Index Emerging Markets tracks the MSCI Emerging Markets index, which contains South Korea. It returned 49% in the 12 months to 30 June 2026, with annualised returns of 10.1% over the decade to that date.

iShares Emerging Markets Equity Index (UK) tracks the FTSE Emerging index. So therefore, it excludes South Korea. Over the same 12 months it returned 27.4%, and 8.8% a year over 10 years.

Both have ongoing charges of 0.20%, so cost is not the differentiator here, the index is. Neither construction is wrong, but the tin says “emerging markets” in both cases while the contents differ materially.

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Concentration is another differentiator

The strength of Asian technology has also left some mainstream emerging market indices unusually top-heavy. At the end of June, the top 10 holdings in Fidelity Index Emerging Markets represented 39.9% of assets, despite the fund holding 1,208 stocks. The equivalent figure for the iShares fund, without South Korea and with 2,122 holdings, was 28.8%.

Almost all of that concentration sits in three companies. In the Fidelity fund, Taiwan Semiconductor Manufacturing represented 15% of assets, Samsung Electronics 8.1% and SK Hynix 7.6%. Taiwan and South Korea together accounted for just over half of the fund’s equity exposure. That is simply what a market-cap weighted index delivers, but it does leave a large part of an emerging markets allocation resting on a single industry cycle.

An actively managed alternative

For investors that are uneasy about passive investing but don’t want to be constrained by the position limits that apply to open-ended funds, the Highly Rated Funds tool also features JPMorgan Emerging Markets Growth & Income (LSE:JMGI), an investment trust carrying a Gold Morningstar Medalist Rating.

The closed-ended structure changes what is possible, as the trust can hold individual stocks above 10%, and it does. As the end of June, it held Taiwan Semiconductor at 18.3%, SK Hynix at 11.3% and Samsung Electronics at 10.1%, with the top 10 accounting for 58.1% of a 57-stock portfolio. On that measure it is more concentrated than either tracker, not less.

The distinction is that the concentration is chosen rather than inherited. Positions are sized on conviction, and the portfolio looks different from the index elsewhere: China was 14.6% of equity exposure against 18.5% for its benchmark the MSCI Emerging Markets index, and India 7.5% against 11.2%.

Austin Forey has run the strategy since 1994 and brings 38 years of industry experience, heading JPMorgan's global emerging markets fundamental team. He works alongside five long-standing colleagues, including John Citron who has been deputy manager there since 2021. The fundamental team has recently been strengthened with four dedicated sector analysts and behind them sits a wider emerging markets and Asia-Pacific equities team of more than 100 investment professionals whose research rests on a well-structured and repeatable framework.

Morningstar rates the People, Process and Parent pillars as High. The quality growth approach favours companies operating in attractive industries with limited external risks, strong balance sheets and solid cash generation, which should reward investors in markets driven by earnings and fundamentals.

From a cost perspective, at 0.79% a year, the trust sits in the second-cheapest quartile of its Morningstar Category.

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The long-term track record

Over the 10 years to 30 June 2026, the JPMorgan Emerging Markets Growth & Income returned 11.6% a year, against 10.1% for Fidelity Index Emerging Markets. The more recent picture is slightly less flattering, as the trust returned 7.5% a year against the tracker’s 8.0% over five years. This reflects a difficult 2025 due to the trust’s overweight to export-oriented Indian IT names such as Tata Consultancy Services and Infosys which were affected by tariff concerns.

The trust is not a lower-risk option in the conventional sense with ten-year volatility of 15.4% which is marginally above the tracker’s 14.9%. However, beta over this period was 0.96 and downside capture was 92.4% which suggests the increased concentration has not made the trust more exposed to market falls.

Jack Paterson is an investment analyst at Morningstar.