Turn Geopolitical Risk Into Emerging Market Alpha in Active ETFs

Looking at emerging market investing options? Ex-U.S. equities — emerging markets included — have been robust performers for portfolios this year, providing a strong source of upside outside of AI-infused megacap tech stocks. Investors can still find plenty of emerging market and foreign equity alpha out there. But geopolitics can pose a risk. Active ETFs and active investing, however, can turn that geopolitical risk into alpha.

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Geopolitical risks have risen dramatically in recent years. While not a new phenomenon, their severity has increased. The Russian invasion of Ukraine, tariff wars, Middle East tensions, and more all pose complicated, layered risks to investing abroad.

On top of the challenges of investing in low-information markets, those risks can potentially derail certain emerging market strategies. Passive funds, for example, must follow strict rules that can make foreign markets particularly bumpy. If, for example, a passive fund must have a certain allocation to small- or large-caps, and events take a toll on either segment more than the other, such passive funds can struggle.

Active ETFs, by contrast, can provide some potent alpha. Not only can active ETFs outdo passive emerging markets ETFs in normal circumstances, they can stand out in geopolitical volatility.

For example, if China were to invade Taiwan, global markets would be thrown into chaos. An active ETF investing abroad can lean on fundamental research to find firms poised to do well even through that volatility.

Active funds like the T. Rowe Price International Equity ETF (TOUS) lean on T. Rowe Price’s fundamental research capabilities to find firms meeting metric standards like cash flow and profitability. Not only that, the fund’s flexibility could help it adapt more quickly to exogenous shocks, like politically driven risks.

Looking ahead, ETFs like TOUS, relying on strong fundamental research capabilities, could make for a useful addition to portfolios. Where passive funds may struggle to ride out geopolitical risks, active ETFs could potentially outperform.

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