Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / Why EM ETFs Are Diverging More Than Ever in 2026
Transcript
- Lucas: So you look at the EM ETF landscape this week and it's almost like two different asset classes living inside one label. The iShares MSCI South Korea ETF, ticker e w y, up thirteen point one percent in just five days. Meanwhile the KraneShares China Internet ETF, K-W-E-B, down zero point seven percent, and Alibaba off four point four percent. Luna: That's a wild divergence. And it's not just Korea versus China — even within China you've got Baidu up almost six percent while Pinduoduo plunges nearly eleven percent. What's driving the split? Lucas: It really comes down to two stories. On the Korea side, it's all about the memory chip revival — Hynix and Samsung riding the AI boom for high-bandwidth memory. That's a structural trend with real demand behind it. The South Korea ETF is basically a semiconductor proxy right now. Luna: And on the China side, it's a mess of competing forces. Alibaba and JD still dealing with regulatory overhang, consumer slowdown, and the broader de-risk narrative. But Baidu gets a boost because it's tied to autonomous driving and AI — so it's like the market is rewarding any Chinese stock that looks like a tech play rather than a consumer one. Lucas: Exactly. And that's the key insight — the old idea of 'emerging markets' as a single asset class is breaking down. You can't just buy the EEM or the VWO and call it a day. The VWO is up only one point five percent this week, and that masks enormous underlying variance. Luna: So what's the investor takeaway? If you want EM exposure, you almost have to go country-specific or even sector-specific now? Lucas: I think that's right. The days when a rising tide lifted all EM boats are probably behind us. The strong dollar is a big part of that — it's still elevated at 119.3 on the trade-weighted index, even if it's ticked down slightly. That hurts countries with high dollar-denominated debt and import-dependent economies. Luna: And helps exporters like Korea and Taiwan — the ones making things the world wants to buy. So the strong dollar is actually a tailwind for them, not a headwind. Lucas: Precisely. And you see that in the trade data too. U.S. exports of goods and services are up to three point five trillion annualised, but imports are even higher at four point four trillion — so the trade deficit is widening. That's partly because the strong dollar makes imports cheaper, but it also reflects that American demand is still robust. Luna: So how does that feed back into the EM divergence? Korea benefits because it exports high-value chips to a strong U.S. economy. China is struggling because its consumer market is weak and its export model is being challenged by tariffs and supply chain shifts. Lucas: Right. And the yuan is at six point seven nine per dollar, which is fairly stable but doesn't give Chinese exporters the kind of competitive boost they might want. The People's Bank seems content to let it drift rather than devalue aggressively. Luna: But back to Korea — thirteen percent in a week. That's not just a semiconductor story, is it? There's also some macro tailwind? Lucas: There is. South Korea's economy is benefiting from the global AI capex cycle, but also from its own fiscal stimulus and a relatively stable political environment. Plus, the won has been weak enough to support exports. So you've got multiple gears turning in the same direction. Luna: Compare that to India — the India ETF, INDA, is up only zero point four percent this week. After all the hype about India as the next China, it seems to be treading water. Luna: India's story is more about domestic demand than export-led growth, so it's less sensitive to the strong dollar. But it's also facing high valuations and some election uncertainty. The market is waiting for the next catalyst. Lucas: And that's the thing — every EM country now has its own distinct narrative. You can't just paint them all with the same brush. Brazil's ETF, EWZ, is down one point three percent this week, hurt by commodity price softness and fiscal concerns. Mexico's EWW is up zero point nine percent, but nearshoring momentum has slowed. Luna: So if I'm an investor with a moderate risk appetite, how should I think about allocating to EM right now? Do you overweight Korea and Taiwan, or look for bargains in beaten-down China? Lucas: That's the million-dollar question. The Korea story has momentum, but thirteen percent in a week means you're buying near the top of a short-term move. China is cheap — Alibaba at twelve times earnings, Pinduoduo even lower — but cheap doesn't mean it can't get cheaper if sentiment turns further. Lucas: I think the smarter play is to think in terms of themes rather than countries. AI and semiconductors are the clear structural winners. If you want EM exposure, you can get it through companies that are part of that global supply chain, regardless of where they're listed. Luna: That's a good point. And it ties into something we've touched on before — the idea that EM investing is becoming more like sector investing. You're not buying a country, you're buying a story. Lucas: Exactly. And speaking of stories, I want to be transparent with you. We try to keep this podcast free of ads and paywalls because we think this kind of analysis should be accessible to anyone who's curious. But it does take time and resources to put together every day. Luna: Yeah, and we really appreciate that our listeners are the ones who make that possible. If you find value in walking through the economy with us, you can support the show at buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. Lucas: No pressure at all — it's just a way for those who can and want to help keep this going. And it genuinely makes a difference. Okay, back to EM divergence. Lucas: So let's talk about what happens next. The big risk for Korea is that the chip cycle turns, or that AI spending disappoints. For China, the risk is that the economy doesn't recover as expected, or that geopolitical tensions escalate further. Luna: And the dollar is the wildcard. If it weakens significantly, that could lift all EM boats — but if it stays strong, the divergence continues. Lucas: Right now the dollar index is at 119.3, which is still high historically. The Fed hasn't signaled any urgency to cut rates, so I don't see a big dollar sell-off anytime soon. That means the current pattern probably persists. Luna: So bottom line: if you want EM exposure, be selective. But if you're just buying the broad ETFs, you're getting a mix of winners and losers that might not match your conviction. Lucas: Exactly. And that's the takeaway for today. The EM market is more fragmented than it's been in years, and that creates both risk and opportunity. The key is knowing what you own and why.