XEQT's Emerging Market Exposure: The 7% of Your Portfolio You Never Think About

I was poking around the iShares website one evening, drilling into XEQT’s underlying holdings the way some people scroll through Instagram, when I stumbled onto something that genuinely surprised me. Buried deep in the portfolio was Taiwan Semiconductor Manufacturing Company – TSMC, the company that makes the chips inside practically every smartphone, laptop, and AI server on the planet. I owned it. I owned Samsung too, and Tencent, and Alibaba, and Reliance Industries – one of the largest companies in India.

I had never bought a single share of any of these companies directly. I had never even opened a brokerage account that could access the Taipei or Mumbai stock exchanges. And yet, through XEQT, I was a part-owner of some of the most important businesses in the developing world. That is the moment I realized I had been ignoring an entire slice of my portfolio – the roughly 7% that sits in emerging markets – and I wanted to understand what I actually owned, why it was there, and whether it was the right amount.

If you have ever looked at your XEQT holdings and glossed over the emerging markets piece, this post is for you. Let me walk you through everything.

1. What Are Emerging Markets, and Why Should You Care?

The term “emerging markets” gets thrown around a lot in investing, but it is worth pinning down exactly what it means.

Emerging markets are countries whose economies are in the process of rapid growth and industrialization, but have not yet reached the full development levels of nations like the US, Canada, Japan, or Germany. They sit somewhere between the poorest developing countries and the richest developed ones.

Think of countries like China, India, Brazil, Taiwan, South Korea, Mexico, Indonesia, Thailand, and South Africa. These are not small, obscure economies. Together, emerging markets represent:

• Over 40% of global GDP (and growing)
• Roughly 85% of the world’s population
• Some of the fastest-growing middle classes on Earth
• Many of the world’s largest and most innovative companies

Here is the thing that makes them so interesting for investors: emerging market economies are growing much faster than developed ones. When you have billions of people moving from rural poverty into urban middle-class life – buying their first car, their first smartphone, their first mutual fund – that creates enormous economic tailwinds.

But there is a catch. Faster economic growth does not always translate to faster stock market returns, at least not in a straight line. Emerging markets come with real risks: political instability, weaker regulatory frameworks, currency volatility, and governance concerns. That combination of high potential and high uncertainty is exactly why they deserve their own section in your portfolio – and exactly why XEQT includes them.

2. How XEQT Gets Its Emerging Market Exposure

If you have read our breakdown of what XEQT actually is, you know it is a “fund of funds” – one ETF that holds four underlying iShares ETFs, each covering a different slice of the global stock market.

Here is the full structure:

That last row is what this entire post is about. XEC – the iShares Core MSCI Emerging Markets IMI Index ETF – is your gateway to the developing world. The “IMI” stands for Investable Market Index, which means it does not just hold the biggest companies. It includes large-cap, mid-cap, and small-cap stocks across emerging market countries, giving you deep and broad exposure.

XEC itself tracks the MSCI Emerging Markets Investable Market Index, which covers over 2,800 securities across 24 emerging market countries. When you buy one share of XEQT, approximately 7 cents of every dollar goes into this slice.

That might sound small. But as we will see, it is doing important work inside your portfolio.

3. Country Breakdown: Where Your Emerging Markets Money Actually Goes

Not all emerging markets are created equal. Some countries dominate the index; others are tiny slivers. Here is a breakdown of the top 10 countries inside XEQT’s emerging markets allocation:

Note: Weights are approximate and shift with market movements. Check the iShares website for the most current figures.

A few things jump out from this table.

Asia dominates. China, India, Taiwan, and South Korea together make up roughly 75% of the emerging markets index. If you think of emerging markets as some exotic, far-flung concept, the reality is that the bulk of your exposure is in Asian tech and manufacturing powerhouses.

The “XEQT Weight” column is humbling. Even China, the single largest emerging market country, represents only about 1.75% of your total XEQT portfolio. India is about 1.4%. These are not concentrated bets. They are small but meaningful positions that add diversification without creating outsized risk.

Latin America and Africa are small but present. Brazil, Mexico, South Africa, and others give you exposure to commodity-rich economies with very different growth drivers than what you get from North America or Europe.

For a broader look at how this fits into XEQT’s total global picture, check out our post on XEQT’s geographic diversification across 49 countries.

4. Top Holdings: The Companies You Own and Probably Didn’t Know About

Let me introduce you to some of the companies sitting inside your XEQT portfolio through the emerging markets slice. These are not obscure penny stocks. They are some of the most important businesses on Earth.

These are not speculative bets. TSMC is arguably the most critical company in the global technology supply chain – without its chips, neither Apple nor Nvidia could function. Samsung makes the memory in your phone and the display on your TV. Reliance Industries is transforming India’s digital economy through its Jio telecom platform, which has over 450 million subscribers.

When you own XEQT, you own tiny slivers of all of these companies. You did not have to research them individually, open foreign brokerage accounts, or figure out how to buy stocks on the Taiwan Stock Exchange. XEQT handles all of that for you through XEC, and BlackRock rebalances it automatically.

That is the magic of an all-in-one ETF. You get exposure to companies that most Canadian retail investors have never heard of, yet that are absolutely central to the global economy.

5. Historical Performance: The Rollercoaster of Emerging Markets

Here is where the story gets nuanced. If you look at the last 10 to 15 years in isolation, emerging markets look like a terrible investment compared to developed markets – especially the US. But zoom out further, and the picture changes dramatically.

The 2010s: Emerging Markets Underperformed

The decade from 2010 to 2019 was brutal for emerging market investors. While the S&P 500 delivered annualized returns of roughly 13-14% per year, the MSCI Emerging Markets Index returned approximately 3-4% annually. The gap was enormous.

Several factors contributed to this underperformance:

• The US tech boom: The rise of FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) powered the S&P 500 to extraordinary heights. Emerging markets had nothing comparable.
• A strong US dollar: When the USD strengthens, it creates headwinds for emerging market assets and currencies.
• China’s economic slowdown: China’s GDP growth decelerated from double digits to the 6-7% range, disappointing investors who had priced in faster growth.
• Commodity price weakness: Many emerging economies depend on commodity exports, and falling oil, metals, and agricultural prices hurt their stock markets.

The 2000s: Emerging Markets Crushed It

Now rewind to the decade before. From 2000 to 2009, emerging markets were the place to be:

Read that again. Emerging markets returned roughly 9-10% per year during the 2000s, while the S&P 500 lost money. If you had put everything in the US because it had crushed the 1990s, you would have sat through an entire decade of negative real returns. Meanwhile, emerging markets were the best-performing asset class on the planet.

The Lesson: Cyclicality Is Real

There is a pattern here that matters deeply for long-term investors. Market leadership rotates. The US dominated the 1990s, emerging markets dominated the 2000s, the US dominated the 2010s. Nobody knows which region will dominate the next decade.

This is the fundamental reason XEQT includes emerging markets at all. Not because they are guaranteed to outperform – they are not. But because they have different return drivers than developed markets. When US tech is struggling, emerging market commodities and consumer growth might be thriving, and vice versa. That lack of perfect correlation is what diversification is all about.

6. The Bull Case for Emerging Markets Going Forward

Despite the rough 2010s, there are compelling reasons to believe emerging markets could deliver strong returns over the coming decades. Here are the big ones:

Demographics

This is the single most powerful argument. Emerging markets have young, growing populations. The median age in India is about 28. In Indonesia, it is 30. In Brazil, 34. Compare that to Japan (49), Germany (46), or Canada (41).

Young populations mean more workers entering the labour force, more consumers reaching peak spending years, and more economic dynamism. While developed nations struggle with aging populations and shrinking workforces, emerging markets have a demographic tailwind that could last decades.

Rising Middle Class

The World Bank estimates that by 2030, roughly two-thirds of the global middle class will live in the Asia-Pacific region. Hundreds of millions of people are moving from subsistence living to a lifestyle that includes smartphones, processed food, banking products, insurance, entertainment, and international travel.

That transition creates enormous demand for goods and services – and enormous profit opportunities for the companies that serve those markets.

GDP Growth

Emerging market economies continue to grow significantly faster than developed ones. While the US and Canada might grow at 1.5-2.5% per year in real terms, countries like India, Indonesia, and Vietnam are growing at 5-7%. Over time, faster GDP growth tends to support corporate earnings growth, even if the relationship is not one-to-one.

Technology Adoption and Leapfrogging

One of the most exciting things happening in emerging markets is technology leapfrogging. Many developing countries are skipping entire stages of infrastructure development. Instead of building landline phone networks, they jumped straight to mobile. Instead of building branch-based banking systems, they are going straight to mobile payments and digital wallets.

India’s UPI (Unified Payments Interface) processes billions of transactions per month. Indonesia’s ride-hailing and digital banking ecosystem is exploding. African nations are pioneering mobile money through platforms like M-Pesa. These are not slow-moving economies – they are adopting technology at breathtaking speed.

Valuation

As of early 2026, emerging market stocks trade at significantly lower price-to-earnings ratios than US stocks. The MSCI Emerging Markets Index trades at roughly 12-14x forward earnings, compared to 20-22x for the S&P 500. That valuation gap does not guarantee outperformance, but it does mean you are paying less for each dollar of earnings in emerging markets – which historically has been a reasonable predictor of better future returns.

7. The Risks: Why Emerging Markets Are Not a Free Lunch

I would be doing you a disservice if I only talked about the upside. Emerging markets come with real, significant risks that you need to understand. Here are the big ones:

Political and Regulatory Risk

Emerging market governments can and do intervene in markets in ways that developed market investors find shocking. The most dramatic recent example is China’s tech crackdown in 2021-2022.

In a span of about 18 months, the Chinese government effectively dismantled the for-profit tutoring industry, imposed sweeping data security rules on tech companies, blocked the Ant Group IPO (what would have been the largest IPO in history), and imposed massive fines on Alibaba for antitrust violations. Chinese tech stocks lost trillions of dollars in market value.

This was not a one-off event. It is a reminder that in many emerging markets, the government has far more power to reshape industries overnight than would be politically feasible in Canada, the US, or Europe.

Currency Volatility

Emerging market currencies can be wildly volatile. The Turkish lira has lost over 80% of its value against the USD since 2018. The Argentine peso has essentially collapsed. Even more stable emerging market currencies like the Brazilian real or Indian rupee can see significant swings that amplify or dampen your investment returns. For a deeper look at how currency movements affect XEQT, see our currency exposure analysis.

Governance and Transparency

Corporate governance standards in emerging markets are generally weaker than in developed ones. Minority shareholder protections may be limited, accounting standards may differ, and state-owned enterprises (which are common in countries like China, Saudi Arabia, and Russia) may prioritize government objectives over shareholder returns.

Geopolitical Risk

Taiwan is one of the largest emerging market positions – and it sits at the centre of one of the most sensitive geopolitical situations in the world. A conflict involving Taiwan would not just devastate the local stock market; it would disrupt the global semiconductor supply chain and send shockwaves through every market on Earth. This is a tail risk, not a base case, but it is real.

Liquidity and Market Access

Some emerging markets have restrictions on foreign ownership, capital controls, or limited market liquidity. While XEQT handles these complexities through its use of large, liquid underlying ETFs, these structural issues can affect how emerging market stocks are priced and how quickly you could exit positions during a crisis.

The Bottom Line on Risk

None of these risks mean you should avoid emerging markets. They mean you should size your position appropriately – which is exactly what XEQT does by keeping the allocation at roughly 7%. You get the diversification benefits without taking an outsized bet on any single country or risk factor.

8. Is 7% Enough? Should You Add More Emerging Markets?

This is the question I get most often when people learn about XEQT’s emerging markets allocation. “Only 7%? Emerging markets are 40% of global GDP! Shouldn’t I have way more?”

It is a fair question. Let me break down both sides.

Why 7% Might Seem Low

If you weighted your portfolio purely by GDP, emerging markets should be 40%+ of your equity allocation. If you weighted by population, it would be even higher. And if you believe the bull case – young demographics, rising middle class, tech leapfrogging – it might feel like you are underweight the fastest-growing part of the world.

Why 7% Actually Makes Sense

XEQT’s allocation is based on market capitalization, not GDP. And there is a good reason for that.

Market cap weighting reflects the investable opportunity set – the actual stocks that foreign investors can freely buy and sell, with proper governance, adequate liquidity, and transparent pricing. Many emerging market companies are state-owned, closely held, or trade on exchanges with limited foreign access. Those companies are not in the index because they are not realistically investable.

When you look at it through this lens, emerging markets represent roughly 10-12% of global equity market capitalization. XEQT’s 7% is slightly below that, partly because of XEQT’s deliberate overweight to Canada (24% vs Canada’s true 3% global weight). The Canadian overweight compresses the allocations to everything else, including emerging markets.

What Happens If You Add More?

Some investors choose to buy additional XEC or a similar emerging markets ETF alongside XEQT. Here is what that looks like in practice:

My Take

For the vast majority of Canadian investors, XEQT’s 7% allocation is just fine. Here is why:

• Simplicity matters more than optimization. The moment you add a second ETF, you introduce the need for manual rebalancing, which means you need to decide when and how much to rebalance – decisions that create opportunities for emotional mistakes.
• The difference between 7% and 12% EM is small in practice. Over a 30-year period, the expected return difference is modest and uncertain. You might gain an extra 0.1-0.2% per year, or you might lose it. Nobody knows.
• The risks are real. A higher EM allocation means more exposure to the political, currency, and governance risks I outlined above. You are essentially making an active bet that EM will outperform, which goes against the passive, stay-the-course philosophy that makes XEQT so effective.

If you genuinely have a strong conviction about emerging markets and you understand the risks, adding a small XEC position is not unreasonable. But if you are asking the question in the first place, you are probably better off keeping it simple and sticking with XEQT alone.

9. The Withholding Tax Angle: An Important Wrinkle

There is one more thing that affects your emerging markets returns inside XEQT, and most investors never think about it: foreign withholding taxes on dividends.

When emerging market companies pay dividends, those dividends pass through two layers of taxation before they reach your Canadian brokerage account:

1. Level 1: The emerging market country (e.g., China, India, Brazil) withholds tax at the source – typically 10-15%, though it varies by country and tax treaty.
2. Level 2: Because XEC is a Canadian-listed ETF that holds foreign stocks, there may be an additional layer of withholding depending on the fund structure and which account type you hold it in.

This double withholding tax drag means the effective yield you receive from emerging market dividends is lower than the headline yield. It is not a reason to avoid emerging markets – the total return (dividends + capital gains) is what matters – but it is worth understanding.

The good news is that in an RRSP, the first layer of US withholding tax on US-listed holdings is typically exempt under the Canada-US tax treaty. But emerging market withholding taxes do not get the same treaty benefits, regardless of account type.

For a complete breakdown of how withholding taxes affect XEQT across different account types, check out our dedicated XEQT foreign withholding tax guide. It goes deep on TFSA vs RRSP vs non-registered accounts and what you can actually do about it.

The bottom line: withholding tax drag on your EM dividends is a real but small cost – probably in the range of 0.1-0.3% per year on the EM portion alone, which translates to a negligible drag on your overall XEQT returns. It is not worth restructuring your portfolio over.

10. Why You Should Not Try to Time Emerging Markets

If you have read this far, you might be thinking: “Emerging markets underperformed in the 2010s and outperformed in the 2000s. Shouldn’t I just buy more when they are cheap and sell when they are expensive?”

In theory, yes. In practice, market timing is nearly impossible, and it is even harder with emerging markets than with developed ones.

Here is why:

• Emerging market recoveries are sudden and violent. Some of the best emerging market returns happen in very short bursts. Miss just a handful of the best days, and your long-term returns collapse. In 2009, the MSCI Emerging Markets Index gained over 70% in a single year. If you had pulled out during the 2008 crisis and waited for things to “stabilize,” you would have missed most of that recovery.

• The narratives are always convincing. There is always a plausible-sounding reason to avoid emerging markets. China is cracking down on tech. Brazil’s currency is collapsing. India’s growth is slowing. The stories feel urgent and real, and they make it incredibly tempting to sell. But those are often exactly the moments when future returns are highest, because pessimism has already been priced into the market.

• Reentry is psychologically brutal. Even if you successfully time an exit, getting back in is the hard part. You will be waiting for the “right moment,” and that moment never feels right. Markets climb a wall of worry, and by the time emerging markets feel safe again, you have already missed years of recovery.

• Transaction costs and taxes. Every time you buy and sell, you pay spreads, and in a non-registered account, you may trigger capital gains taxes. These costs are small individually but compound over time.

XEQT solves this problem elegantly. By holding a fixed allocation to emerging markets through XEC and rebalancing automatically, it does the hard work for you. When EM drops, XEQT’s rebalancing effectively buys more at lower prices. When EM surges, it trims the position. You get systematic, disciplined exposure without any emotional decision-making.

11. Final Thoughts: Trust the Allocation and Stay the Course

Let me bring this full circle. When I first discovered that my XEQT held Taiwan Semiconductor, Samsung, Tencent, and dozens of other emerging market companies, my immediate instinct was to question whether 7% was “right.” Should it be 15%? Should it be 3%? Should I be overweighting India because of its demographics? Should I be underweighting China because of regulatory risk?

After spending way too many hours researching this, here is what I came back to: I do not know, and neither does anyone else.

Nobody knows which countries will outperform over the next 20 years. Nobody knows whether emerging markets will have a 2000s-style bull run or another 2010s-style drought. The entire point of XEQT is to own everything, in roughly market-cap proportions, and let the market sort it out.

That 7% emerging markets allocation is not an accident. It is a deliberate, research-backed decision by BlackRock’s portfolio construction team. It gives you exposure to the fastest-growing economies in the world while keeping the risks manageable. It provides diversification benefits that improve your portfolio’s risk-adjusted returns over full market cycles. And it does all of this without requiring you to make a single additional decision.

Here is what I would tell my past self, back when I was staring at that TSMC holding and wondering what to do about it: do nothing. The 7% is there for a reason. It is working quietly in the background, adding diversification, capturing growth in parts of the world you would never invest in on your own, and protecting you from the risk of concentrating everything in North America.

You do not need to become an emerging markets expert. You do not need to read reports on Indian GDP growth or Chinese regulatory policy. You do not need to add more XEC or tilt your portfolio toward any particular country.

You just need to keep buying XEQT, reinvest your dividends, and let time do the heavy lifting. The emerging markets allocation – that quiet 7% you rarely think about – is doing exactly what it is supposed to do.

Stay the course.