The case for factor investing in emerging markets
- Robin Powell
- 2 hours ago
- 10 min read
Emerging markets contain 37.4% of the world's listed companies, yet most investors either ignore them or hand their money to active managers — 87% of whom underperform over 15 years. Academic research points to a better approach: targeting the company characteristics that have persistently driven higher returns. As always, this isn't financial advice, but it is worth understanding.
If you've ever walked into a foreign bazaar — Istanbul, Marrakech, Bangkok — you'll know the feeling. Thousands of stalls, unfamiliar goods, no obvious way to tell quality from junk. Colours and noise overwhelm you. You can't read half the signs. And everyone's competing for your attention.
Most tourists handle this in one of two ways. They retreat to the hotel gift shop, where everything's familiar but overpriced. Or they hire a local guide who promises to know the best stalls. The guide sounds convincing, but you can never quite tell whether they're steering you toward genuine bargains or their cousin's carpet shop.
That's how most people approach emerging market investing.
The "gift shop" investor sticks to developed markets. Familiar names, familiar indices, familiar comfort. But they're paying premium prices for that familiarity and missing a huge chunk of the world's publicly listed companies.
The "hire a guide" investor puts their money with an active fund manager who claims deep local knowledge. The pitch is appealing: these are complex, under-researched markets where a skilled stock-picker can find hidden gems. But the data tells a different story.
According to the SPIVA scorecards, 87.2% of actively managed emerging market funds sold in the US underperformed their benchmark over 15 years.
There's a third option. Instead of avoiding the bazaar or trusting a guide, you learn what to look for yourself. You study the indicators of quality and value that signal better goods at fair prices.
That's the core idea behind factor investing in emerging markets. The evidence comes not from a single study or a sales pitch, but from independent research on three continents, spanning decades, tested through multiple bull and bear markets. Better still, it's now accessible through a handful of low-cost funds.
Emerging markets are bigger than most investors realise
Emerging markets punch well below their weight in most portfolios. They make up 11.3% of global stock market capitalisation but account for 37.4% of listed companies worldwide. That gap between market cap share and company count is where things get interesting for factor investors — more companies to screen means a richer hunting ground for the characteristics linked to higher returns.
The latest Avantis Monthly ETF Field Guide digs into why emerging markets deserve a closer look. Its analysis lines up with the academic research — and the charts paint a vivid picture.
Valuations are just as striking. The MSCI Emerging Markets Investable Market Index trades on a price-to-earnings ratio of 16.1, compared with 27.6 for the S&P 500. Most major EM countries sit in a range of ten to 15, with only India and Taiwan trading at levels close to developed markets.
Recent returns have been substantial. In 2025, the MSCI Emerging Markets Index returned 33.6%, compared with 18% for the S&P 500. But headline numbers can mislead. The real question is which types of companies drive returns within these markets, and why.
Most emerging market fund managers can't beat the market
The fund industry's favourite line on emerging markets goes something like this: these are inefficient markets where skilled stock-pickers can add real value. It's a compelling story. It's also wrong.
The SPIVA scorecards track active fund performance across every major domicile, and the numbers are brutal. In the US, 85.9% of actively managed emerging market funds underperformed their benchmark over ten years. Stretch that to 15 years and it's 87.2%.
European investors fared even worse: 94.0% of euro-denominated EM funds lagged their index over a decade, with sterling-denominated funds close behind at 91.0%. Canadian EM funds? 88.5% underperformed over ten years.
These aren't hand-picked time periods. They span bull runs, crashes, and recoveries. The pattern holds regardless of where the fund is sold or which currency it's measured in.
And the real picture is probably worse. Around two-thirds of EM funds that existed 20 years ago have been closed or merged, usually because their track records became too embarrassing to market.
The reasons aren't mysterious. High fees create a persistent headwind that compounds against investors year after year. And many so-called active managers are closet indexers, charging active fees for portfolios that barely deviate from the benchmark.
So if stock-picking doesn't work, what does? Factor investing in emerging markets starts with a different question: which measurable company traits have reliably predicted higher returns?
What the research tells us about factor investing in emerging markets
Certain types of companies in emerging markets have beaten the broad market consistently. That's the headline finding from 25 academic studies, and it points to a third path between passive indexing and active stock-picking.
Factor investing means tilting portfolios toward companies with measurable characteristics — low prices relative to their fundamentals, higher profitability, or smaller market capitalisations. Eugene Fama and Kenneth French pioneered this framework in the early 1990s, but most of the initial evidence came from US stocks. Over the past two decades, researchers have tested these same factors in Asia, Latin America, and Eastern Europe. Three clear patterns have emerged.
Value: the premium that survives everything
Buying cheap companies works in emerging markets. The evidence is about as strong as it gets in finance.
In Pakistan, the value premium — the return gap between cheap and expensive stocks — ran at 12.27% per annum (Mirza & Shahid, 2008). In Central and Eastern Europe, the cheapest 30% of companies delivered returns 7.4 percentage points above the most expensive 30% (Zaremba, 2015). Across 46 countries, Chaieb, Langlois, and Scaillet (2020) found a median value premium of 2.31%. In India, the effect held up in every sub-period tested from 1999 to 2020, surviving changes in government, two global crises, and a pandemic (Singh et al., 2022; Pandey, 2019).
But here's the finding that stands out. When Zaremba and Konieczka (2015) tested what happened to factor premiums in 11 Central and Eastern European markets after accounting for real-world trading costs — spreads, liquidity constraints, market frictions — value was the only premium left standing.
That matters. The value premium isn't a statistical artefact that vanishes when you try to capture it in a live portfolio.
Profitability: the factor nobody was looking for
For years, most EM research used the original Fama-French three-factor model, which includes market risk, size, and value but ignores profitability. The premium wasn't absent. Researchers just weren't testing for it.
When they did, the results were clear. Across 46 countries, the median profitability premium came in at 1.55% — smaller than value, but with noticeably less variation over time (Chaieb et al., 2020). A factor that delivers a modest premium reliably can be worth more in a portfolio than one that swings between spectacular and terrible.
In India, profitability proved significant across the full 1999–2020 period and held up in different risk environments (Singh et al., 2022). In Central and Eastern Europe, Zaremba (2014) documented a strong gross-profitability premium and found that profitable companies provided a partial hedge during market stress.
Combining value with profitability gives you two premiums that behave differently. That helps smooth the ride.
Size: real returns, brutal costs
Small-cap stocks in emerging markets look fantastic on paper. In Pakistan, the size premium ran at 9.15% per annum. In Poland, small companies outperformed large ones by 13 percentage points.
Those are gross returns. In emerging markets, the gap between gross and net can be savage.
Zaremba and Konieczka (2015) described the impact of transaction costs on the size premium across 11 CEE markets as "almost lethal." After accounting for trading frictions and thin liquidity, those initially impressive premiums were "obliterated." Poland's size advantage vanished entirely.
Think of it like those stalls tucked down a narrow alley in the bazaar. The prices look incredible, but the effort and cost of getting there wipe out whatever you'd save.
Small-cap exposure isn't worthless. But capturing it requires sophisticated trading infrastructure — the kind only a handful of systematic fund managers have built. For most investors, the smarter bet is value and profitability, where the evidence is strongest and implementation costs manageable.
What happens when you combine the strongest factors
Targeting value and profitability together produces returns that neither factor delivers alone.
The Avantis field guide includes an analysis that makes this point powerfully. Avantis sorted all emerging market companies by two traits: equity-to-price (a measure of value) and profitability. They tracked performance from mid-1991 to the end of 2025. Companies scoring high on both returned 12.20% annualised. The broad EM market returned 8.17%. Companies scoring low on both returned 2.89%.
That 4.03 percentage point gap doesn't sound life-changing in any single year. Compounded over 34 years, it's enormous. A £10,000 investment at 8.17% grows to roughly £140,000. At 12.20%, it grows to over £500,000.
The 2.89% group? About £26,000. Barely ahead of inflation.
This isn't selective backtesting. It aligns with what independent studies found across different countries, time periods, and methodologies. Those studies examined individual factors in isolation. The Avantis field guide data shows what happens when you screen for both at once.
So how do you get this exposure in a portfolio?
How to access factor investing in emerging markets
How you capture factor premiums matters almost as much as which factors you target. Transaction costs wiped out the size premium in Central and Eastern Europe entirely — a poorly built factor fund can suffer the same fate with value and profitability.
The distinction comes down to methodology. Traditional factor ETFs use index reconstitution: once or twice a year, they reshuffle their holdings based on a snapshot of factor scores. Stocks are either in or out. That creates predictable trading patterns, concentrated turnover on reconstitution dates, and higher market impact costs. In thin EM markets, that's expensive.
A continuous scoring approach works differently. Holdings shift gradually, position sizes reflect the strength of factor signals, and trades are timed to cut costs. In emerging markets, the difference matters more.
Here's what's available.
UK and European investors
Avantis Emerging Markets Equity UCITS ETF (AVEG on the LSE, AVEM on XETRA) charges a TER of 0.35% and holds around 3,900 companies with systematic tilts toward value, profitability, and smaller size. It listed in December 2024, so it's new. iShares Edge MSCI EM
Value Factor UCITS ETF (EMVL) is more established at £392.5 million in assets, charges 0.40%, and carries a Morningstar Gold rating, but screens for value only. For comparison, the Vanguard FTSE Emerging Markets UCITS ETF charges 0.22% with no factor tilts.
US investors
Avantis Emerging Markets Equity ETF (AVEM) has gathered $18.4 billion in assets at a TER of 0.33%, making it the largest systematic multi-factor EM fund available. For a deeper value tilt, there's Avantis Emerging Markets Value ETF (AVES) at 0.36%. iShares Emerging Markets Equity Factor ETF (EMGF) takes a multi-factor approach with a Morningstar Bronze rating. The market-cap baseline is iShares Core MSCI Emerging Markets ETF (IEMG) at 0.09%.
Australian investors
Avantis Emerging Markets Equity Active ETF (AVTE) is available through Equity Trustees Limited. Dimensional offers EM factor exposure too, but only through adviser channels rather than directly to DIY investors.
The cost question
Factor EM ETFs charge 0.33%–0.40%, roughly double the cheapest market-cap trackers. Is the extra 0.15%–0.25% worth it? If the value and profitability premiums continue at anything close to historical levels, the maths works comfortably in favour of the factor approach over long holding periods. But if the fund's construction methodology is poor, higher fees buy you nothing. Choose the method, not just the label.
You don't need a guide in the bazaar. You need to know which stalls carry quality goods at fair prices.
That's what 25 years of research tells us. The case for factor investing in emerging markets rests on two premiums — value and profitability — that are real, persistent, and unlike the size premium, survive the transaction costs that make these markets harder than developed ones. Most active managers can't beat the market. A systematic factor approach doesn't promise to beat it every year either. But over the time horizons that matter for building wealth, the compounding advantage has been substantial.
The tools are here. Low-cost ETFs with sensible construction are now available in the UK, Europe, the US, and Australia. The research is clear. The products exist. The only question is whether you'll keep browsing the gift shop or step into the market and start looking for yourself.
Resources
Avantis Investors. (2026). Monthly ETF Field Guide: Talking Points for Client Conversations, January 2026. American Century Investments.
Chaieb, I., Langlois, H., & Scaillet, O. (2020). Factors and risk premia in individual international stock returns. Journal of Financial Economics.
Mirza, N., & Shahid, S. (2008). Size and value premium in Karachi Stock Exchange. Lahore Journal of Economics, 13(2).
Pandey, A. (2019). Equity market anomalies, VIX and asset pricing: Trading strategies for India.
Singh, K., Singh, A., & Prakash, P. (2022). Testing factor models in an emerging market: Evidence from India. International Journal of Managerial Finance.
Zaremba, A. (2014). Quality investing in CEE emerging markets.
Zaremba, A. (2015). Value, size, momentum, and unique role of microcaps in CEE market stock returns.
Zaremba, A., & Konieczka, P. (2015). Are value, size and momentum premiums in CEE emerging markets only illusionary?
Disclosure
This article is for educational and informational purposes only and does not constitute financial advice, a personal recommendation, or an invitation to buy or sell any investment. Past performance is not a reliable indicator of future results. The value of investments and the income from them can go down as well as up, and you may get back less than you invest. Always do your own research and consider seeking advice from a qualified, independent financial adviser before making investment decisions.
You understand the evidence. Now find an adviser who believes it too
Our Find an adviser directory lists professionals committed to low-cost, globally diversified portfolios and straight answers. Connect with someone who'll respect your knowledge instead of trying to sell you expensive active funds. Search your area now.
Financial advisers: stop writing content at 11pm
You're brilliant at financial advice. You're probably not brilliant at churning out blog posts and client newsletters at the end of a long day. Let me handle the content whilst you focus on serving clients. Email Robin or message him on LinkedIn to discuss how Regis Media can build your content programme.
