Investing in emerging markets (EM) offers potential for strong growth and diversification, but deciding between EM mutual funds and ETFs can be challenging. Each vehicle has unique advantages, fees, risks, and trading structures that can significantly impact your long-term portfolio performance.
In this article, we explore the best emerging market mutual funds and ETFs in 2025, compare them across key factors, and provide actionable guidance for investors.
Understanding Emerging Market Funds
Emerging market funds invest in economies that are in a phase of rapid development. Countries in Asia, Latin America, Eastern Europe, and parts of Africa offer higher growth potential than developed markets due to expanding industries, rising middle-class populations, and increasing corporate earnings.
These funds generally come in two forms:
Mutual Funds: Professionally managed pools of capital invested in a diversified range of EM stocks or bonds. They may be actively managed to outperform a benchmark index.
ETFs (Exchange-Traded Funds): Funds that trade on exchanges like individual stocks, often passively tracking an index of EM equities.
Both options allow investors to gain EM exposure without picking individual stocks.
Key Differences Between EM Mutual Funds and ETFs
Investors should consider several important differences between mutual funds and ETFs:
1. Trading Flexibility
Mutual Funds: Executed at end-of-day NAV pricing, which limits intraday trading.
ETFs: Bought and sold throughout the day, giving investors flexibility in timing trades and potentially taking advantage of market swings.
2. Costs and Fees
Mutual Funds: Typically carry higher expense ratios and may include front-end or back-end loads.
ETFs: Usually lower-cost, with many commission-free options. Investors may incur bid-ask spreads, but overall costs tend to be smaller than mutual funds.
3. Minimum Investment Requirements
Mutual Funds: Often require $1,000–$3,000 to start.
ETFs: Can be purchased by the share, making them accessible even for smaller investors.
4. Tax Efficiency
Mutual Funds: May distribute capital gains annually, creating taxable events.
ETFs: Tax-efficient due to in-kind creation/redemption processes, which reduce capital gains distributions.
5. Active vs Passive Management
Mutual Funds: Many EM mutual funds are actively managed, attempting to outperform a benchmark index.
ETFs: Most EM ETFs are passively managed, tracking an index like MSCI Emerging Markets or FTSE Emerging Markets.
Top Emerging Market Mutual Funds in 2025
Here are some of the highest-rated EM mutual funds for investors looking to gain diversified exposure:
1. Fidelity Emerging Markets Fund (FEMKX)
Expense Ratio: 0.79%
5-Year Average Return: 7.8%
Highlights: Active management with a focus on large-cap growth stocks in Asia and Latin America. Ideal for long-term growth investors.
2. T. Rowe Price Emerging Markets Stock Fund (PRMSX)
Expense Ratio: 0.84%
5-Year Average Return: 8.2%
Highlights: Diversified across mid- and large-cap EM stocks. Active management seeks undervalued companies.
3. Vanguard Emerging Markets Stock Fund (VEMAX)
Expense Ratio: 0.79%
5-Year Average Return: 6.9%
Highlights: Low-cost active management blending growth and stability. Offers access to a broad mix of EM equities.
Top Emerging Market ETFs in 2025
ETFs provide cost-effective, liquid alternatives for EM investing:
1. iShares MSCI Emerging Markets ETF (EEM)
Expense Ratio: 0.68%
5-Year Average Return: 6.7%
Highlights: Tracks the MSCI Emerging Markets Index with broad exposure to China, Taiwan, India, and Brazil.
2. Vanguard FTSE Emerging Markets ETF (VWO)
Expense Ratio: 0.07%
5-Year Average Return: 6.8%
Highlights: Tracks the FTSE Emerging Markets All Cap China A Inclusion Index, offering low-cost diversification.
3. Schwab Emerging Markets Equity ETF (SCHE)
Expense Ratio: 0.11%
5-Year Average Return: 6.5%
Highlights: Low-cost, broad exposure to EM equities through the FTSE All Emerging Index.
Comparing EM Mutual Funds vs ETFs
Here’s a side-by-side text-based comparison to help investors quickly evaluate options:
Emerging Market Mutual Funds vs ETFs: Key Comparison
| Feature | EM Mutual Funds | EM ETFs |
|---|---|---|
| Management Style | Mostly active; some passive | Mostly passive; index-tracking |
| Expense Ratio | 0.7% – 0.85% (higher) | 0.07% – 0.68% (lower) |
| Trading Flexibility | End-of-day NAV pricing | Traded intraday like stocks |
| Minimum Investment | $1,000 – $3,000+ | Usually one share; low entry cost |
| Tax Efficiency | Lower; potential capital gains distributions | High; in-kind creation/redemption limits taxes |
| Performance Potential | Potential to outperform index via active management | Tracks index; unlikely to outperform |
| Diversification | Moderate to high, depends on fund | High, broad index coverage |
| Liquidity | Moderate | High (traded on exchanges) |
| Ideal Investor | Long-term, seeking active management | Cost-conscious, tax-efficient, flexible trading |
Performance Analysis
Looking at the top performers over the past five years:
| Fund/ETF | Expense Ratio | 5-Year Avg Return | Notes |
| FEMKX (Mutual Fund) | 0.79% | 7.8% | Active management, growth-focused |
| PRMSX (Mutual Fund) | 0.84% | 8.2% | Diversified, mid- and large-cap exposure |
| VEMAX (Mutual Fund) | 0.79% | 6.9% | Balanced, low-cost active management |
| EEM (ETF) | 0.68% | 6.7% | Broad EM index tracking |
| VWO (ETF) | 0.07% | 6.8% | Low-cost, large-cap index tracking |
| SCHE (ETF) | 0.11% | 6.5% | Broad exposure, low fees |
Observation: Active EM mutual funds have slightly outperformed ETFs historically, but ETFs like VWO provide dramatically lower costs and higher tax efficiency. Investors must balance growth potential with costs and taxes.
Risks of Emerging Market Investing
EM investments come with unique risks:
Currency Risk: EM currency fluctuations can impact returns.
Political Risk: Political instability can increase volatility.
Liquidity Risk: Some EM stocks may be less liquid.
Economic Risk: Slowdowns or inflation spikes in EM countries can reduce fund performance.
Active mutual funds may mitigate some risks via stock selection, whereas ETFs rely purely on diversification.
Choosing the Right Vehicle for Your Portfolio
When to Choose EM Mutual Funds
You prefer professional stock selection.
You are investing a substantial amount long-term.
You are comfortable paying higher fees for potential outperformance.
When to Choose EM ETFs
You want low-cost, broad exposure.
You want intraday trading flexibility.
You are tax-sensitive or investing smaller amounts.
Many investors find that a combination of both — using an EM ETF for baseline exposure and a selective active mutual fund for targeted growth — creates a balanced approach.
Tips for EM Investing Success
Diversify across regions to avoid concentration in a single country.
Blend fund types for cost-efficiency and growth potential.
Monitor fees closely, as they significantly impact long-term returns.
Stay long-term focused, since EM markets are more volatile.
Consider currency exposure, as funds investing across multiple currencies offer natural hedging.
Conclusion
Emerging markets offer strong growth opportunities and portfolio diversification, but choosing between mutual funds and ETFs requires careful consideration. Mutual funds can provide active management and the potential to outperform, while ETFs offer low costs, liquidity, and tax efficiency. Combining both may provide the optimal balance for many investors.
By evaluating fees, trading flexibility, risk, and performance potential, you can make informed decisions that align with your investment goals and risk tolerance.
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