Stocks in Emerging Markets Are Crushing the S&P 500. Should You Invest?

September is a wrap, and it was a good one for the market. All major asset classes posted gains during the month. But one equity asset class had to beat the rest, and last month, it was stocks in emerging markets.

Emerging market stocks, as measured by the FTSE Emerging Markets All Cap China A Inclusion Index, rose 6.6% last month. That beat the performance of U.S. stocks (up 3.4%) and large-cap U.S. stocks as measured by the S&P 500 index (up 3.6%).

Stocks from emerging economies even beat the Nasdaq 100, which holds all the big-tech growth stocks like Nvidia and Microsoft. That index climbed 5.4% during September.

Investors hoping to ride the wave of emerging market stocks can do so using the Vanguard FTSE Emerging Markets ETF (VWO 0.23%). It closely tracks the FTSE emerging market index, and it rose 5.7% during September and is up 24% for the year.

It’s highly diversified

The emerging markets ETF holds about 6,000 large-, mid-, and small-cap stocks from more than 20 emerging economies. As of late last year, Chinese stocks accounted for about 29% of the fund.

The Vangurd ETF’s biggest holdings are:

• Taiwan Semiconductor Manufacturing (9%)
• Tencent Holdings (4.7%)
• Alibaba Group Holding (2.9%)
• HDFC Bank (1.2%)

But other than Taiwan Semiconductor, no stock accounts for more than 5%, and the fund’s 10 largest positions account for about 20% of its assets, which makes it highly diversified.

So, what’s driving the recent spike in these stocks? And, perhaps more important, can the rally continue?

A weaker dollar

Several factors are behind the recent rise in emerging market stocks and indexes. First, there’s the weakening dollar. So far, 2025 is the worst year for the dollar since 1973. The greenback is down almost 10% year to date.

President Donald Trump campaigned on weakening the dollar to bolster U.S. manufacturing, and so far he delivered on that promise. And now, with the Federal Reserve back in a rate-cutting cycle, the dollar looks like it will lose even more ground against other currencies.

A weaker dollar makes debt cheaper for emerging market countries, it makes their exports more competitive, and it encourages global investment into their economies.

Improved economic performance in many of these markets is a huge part of the story here, too. Structural changes are bolstering growth in many of these economies. The International Monetary Fund recently raised it outlook for economic growth across emerging markets from 3.7% to 4.1%, and much of that improvement comes from a brighter forecast for China’s economy.

And compared to U.S. stocks, which have had a huge run-up in recent years, emerging market stocks are cheap. The forward price-to-earnings ratio for these stocks is about 12. For the S&P 500 index, that ratio stands at about 22.5 right now. That makes emerging market stocks a huge bargain compared to U.S. stocks.

A low expense ratio

And investing in Vanguard Emerging Markets ETF is dirt cheap. The fund’s expense ratio — the annual operating cost deducted from any investment to cover management, administration, and distribution fees — is just 0.07%. That compares well to the average expense ratio of similar funds, which is 1.12%. Morningstar, which tracks funds like this, calls the Vanguard ETF one of the lest expensive funds in the category, with an “ultra-low price tag.”

There is always geopolitical risk to consider when you invest in emerging markets. But at the moment, these economies are on the whole relatively stable and poised for growth, while much of the current global uncertainty is coming from advanced economies like the U.S.

So perhaps now is the time to put $1,000 into emerging market stocks. And the Vanguard FTSE Emerging Markets ETF is a good way to do it.