WisdomTree Emerging Markets ex-State-Owned Enterprises Fund

XSOE

Market cap $2.12B

At the same time developed markets have been generating policy and macro noise, emerging markets have been quietly outperforming. The inextricable relationship between the direction of U.S. monetary policy and emerging market risk assets remains powerful, but this time the rally is not just about the Fed.

Emerging markets equity returns have been driven by extreme mega-cap concentration, with index breadth collapsing to historic lows and masking weakness across much of the opportunity set. This concentration has distorted relative results for active managers, particularly those constrained by diversification rules or broad benchmarks, as small-cap underperformance and index construction limit flexibility.

One of the big 2025 stories has been the resurgence of emerging market equities. As of September 9, the MSCI Emerging Markets Index was outpacing the S&P 500 by a nearly 2-to-1 margin.

In the early part of this century, emerging market equities were all the rage. And those stocks delivered on the hype.

Emerging markets are entering a new bull run, driven by improved inflation and stronger economic growth prospects. 2025 looks like a good time to increase exposure to these markets. Non-state-owned enterprises generally offer higher asset quality and innovation, outperforming SOEs; Wisdom Tree's ETFs avoid SOEs for better returns.

By Jeff Weniger, CFA, Head of Equity Strategy Key Takeaways South Korea's classification as an “emerging” or “developed” market affects funds' allocations, with some emerging markets funds having no exposure to the country. The “Korea Discount” refers to the low valuations placed on South Korea's stocks relative to stocks in other countries.

Emerging markets continued to expand at a solid pace midway into the first quarter of 2024, supported by broad-based expansion across both manufacturing and service sectors.

Emerging markets have taken solace in the view that the U.S. hiking cycle is over, helping deliver strong returns in 2023. Slowing global inflation has been due to sharply lower core goods inflation, while service prices have remained stickier.

Emerging markets will also be looking closely at economic conditions in mainland China, which will be a key determinant of broader emerging market growth in 2024. A key reason for diverging emerging and developed market performance was the marked variation in demand conditions.

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