The Avantis Emerging Markets Equity ETF (NYSEARCA: AVEM) achieved a remarkable 35% return in 2025, outperforming major Vanguard funds such as the Vanguard S&P 500 ETF (NYSEARCA: VOO) and Vanguard Total Stock Market ETF (NYSEARCA: VTI) by approximately 17 percentage points. With assets totaling $15.1 billion, this fund’s performance indicates a potential resurgence for emerging markets, particularly in light of recent macroeconomic trends.
The driving force behind AVEM’s success in 2025 was a notable 9% decline in the US dollar, which made emerging market assets more attractive to investors. As the dollar weakened, capital flowed back into developing economies, enhancing local currency returns for U.S. investors. The outlook for 2026 now hinges on the dollar’s strength and the broader economic landscape.
Key Factors Influencing Future Performance
Monitoring the dollar index will be crucial going forward. If the index surpasses recent highs, AVEM may face headwinds despite individual stock performances. The Federal Reserve’s interest rate decisions, trade policies, and global economic growth forecasts will also shape the fund’s trajectory. Investors should pay close attention to monthly statements from the Federal Reserve and quarterly GDP reports from key emerging markets, with a particular focus on China and India.
China’s economic policies remain particularly significant for AVEM, which has substantial investments in major Chinese technology and banking firms, including Tencent and Alibaba. The Chinese government’s recent shift towards supporting the private sector and implementing stimulus measures contributed to AVEM’s impressive gains in 2025. Continued support or an increase in these measures in 2026 could further enhance the fund’s performance, while a tightening of policies or escalating geopolitical tensions could present challenges.
Sector Concentration and Risks
AVEM’s investment strategy heavily emphasizes the semiconductor sector, with its largest holding being Taiwan Semiconductor (NYSE: TSM), comprising 6.35% of the portfolio. Other significant positions include Samsung Electronics, SK Hynix, and MediaTek. While this concentration has yielded strong results due to surging demand for AI chips, it also poses risks. Any downturn in the semiconductor cycle or disruptions in the supply chain could adversely affect the fund’s performance.
Additionally, the fund’s geographic exposure to Taiwan raises geopolitical risks that are not present in broader U.S. market funds. Investors should remain vigilant regarding any escalation in cross-strait tensions or changes in U.S.-China technology policies that could impact semiconductor firms. Although TSM’s expansion in Arizona may mitigate some risks over time, the concentration in Taiwan remains a critical consideration.
For those seeking a more straightforward investment approach, the iShares Core MSCI Emerging Markets ETF (NYSEARCA: IEMG) offers a viable alternative. With assets of $117 billion, IEMG provides deeper liquidity and a significantly lower 0.09% expense ratio, compared to AVEM’s 0.33% fee. While AVEM targets smaller companies and undervalued stocks, IEMG tracks a broader market-cap weighted index. The effectiveness of AVEM’s strategy in 2026 will depend on the continued viability of value investing and the performance of smaller companies in the emerging markets sector.
Overall, the upcoming year will be critical for AVEM as it navigates the complexities of currency fluctuations, economic policies, and sector-specific risks. Investors will need to weigh these factors carefully to determine whether this fund will maintain its momentum or face new challenges ahead.
