IXUS vs. IEMG: A Portfolio Strategist's Guide to International Allocation

The core portfolio question is whether this year's emerging markets rally is a tactical trade or the start of a structural re-rating. The evidence points to a powerful, multi-faceted tailwind. EM has delivered strong returns in 2025, with the MSCI Emerging Markets Index up 25.1% year-to-date, decisively outperforming developed markets and the U.S. This outperformance is underpinned by a confluence of factors: historically low valuations, expectations of double-digit earnings growth, a weaker dollar, and a shift away from U.S. exceptionalism. For institutional allocators, the decision is not about whether to be in international equities, but how to structure that exposure.

Against this backdrop, the choice between IXUS and IEMG crystallizes into a fundamental trade-off between balance and conviction. The thesis is clear: IXUS is a more balanced, lower-cost core holding, while IEMG is a higher-risk conviction bet. The performance gap between the two funds over the past year underscores this divergence: IXUS returned 35.9% versus IEMG's 41.5%. This differential highlights the concentrated, growth-oriented nature of IEMG's pure-play EM mandate.

The mandate difference is structural. IXUS spans the entire non-U.S. stock universe, offering a diversified blend of developed and emerging markets. In contrast, IEMG focuses solely on emerging markets, concentrating its risk in faster-growing but more volatile economies. This distinction shapes the risk profile: IEMG carries a higher maximum drawdown over the past five years and has a more concentrated sector and company exposure, particularly in technology. For a portfolio manager, IXUS provides a lower-cost, more stable platform for core international allocation, while IEMG represents a deliberate, higher-beta bet on the EM re-rating thesis.

Risk-Adjusted Returns and Sector Rotation Benefits

For institutional allocators, the choice between these funds extends beyond simple performance. The operational and risk-adjusted differences are critical for portfolio construction, particularly when considering sector rotation and liquidity management.

First, consider the cost and liquidity infrastructure. IXUS trades at a lower annual expense of 0.07% compared to IEMG's 0.09%. More importantly, liquidity differs significantly: IXUS averages 2.5 million shares in daily volume, while IEMG sees 13 million shares. This creates a practical trade-off. IEMG's higher volume supports larger, more efficient trades and may offer tighter bid-ask spreads for big orders, a key consideration for institutional flow. However, IXUS's lower cost and broader diversification provide a more stable, lower-friction platform for core positioning.

The risk profiles further define their roles. IEMG's mandate concentrates its exposure, resulting in a lower beta of 0.96 versus IXUS's 1.02. This counterintuitive result-where a pure EM fund has lower beta than a total international fund-reflects the specific composition of its holdings, which are heavily weighted toward cyclical sectors like technology and financials. This concentration drives higher volatility, as evidenced by IEMG's larger maximum drawdown over the past five years. IEMG also pays a lower dividend yield of 2.75% compared to IXUS's 3.24%, aligning with its growth orientation.

The scale of assets under management (AUM) reinforces these dynamics. With $51.9 billion versus IEMG's $120.0 billion, IXUS is a smaller, more nimble vehicle. IEMG's massive size reflects its status as a benchmark for the EM asset class, which can lead to tighter tracking error but also greater market integration and potential for larger tracking differences during periods of high volatility or illiquidity.

For sector rotation strategies, these differences are pivotal. IXUS's broader mandate and higher dividend yield make it a natural candidate for a defensive or income-oriented core holding. Its exposure to developed market staples and industrials provides a buffer during EM-specific downturns. IEMG, by contrast, is a pure-play vehicle for tactical bets on EM sector leaders, particularly technology and financials. Its higher beta and concentration mean it will amplify both the gains and the pain of a sector rotation into or out of these cyclical areas. In practice, an allocator might use IXUS to maintain a stable international footprint while using IEMG to overweight or underweight EM based on the growth cycle, leveraging its liquidity for timely execution. The bottom line is that IXUS offers a lower-cost, diversified platform, while IEMG provides a higher-conviction, higher-liquidity tool for targeted EM exposure.

Valuation, Catalysts, and Portfolio Implementation

The sustainability of recent returns hinges on the durability of the macro tailwinds that have driven the outperformance. For emerging markets, the evidence points to a supportive backdrop: historically low valuations, expectations of double-digit earnings growth, a weaker dollar, and a shift in market sentiment away from U.S. exceptionalism have attracted global capital. This confluence of factors has allowed EM to take the leadership baton in 2025, with the MSCI Emerging Markets Index up 25.1% year-to-date outperforming both developed markets and the US. The primary catalyst for this rally is the easing of global monetary policy, as central banks benefit from greater flexibility with inflation moderating worldwide Earlier rate cuts have supported growth and investor sentiment.

For institutional investors, the key question is which fund best captures these catalysts while managing the primary risk. The most significant threat to a pure EM conviction like IEMG is a resurgence of U.S. equity dominance. If the U.S. economic cycle re-accelerates or if global risk-off sentiment returns, the concentrated, growth-oriented nature of IEMG's portfolio could lead to outsized drawdowns. Its higher volatility and sector concentration make it more vulnerable to a reversal in the current "away from US exceptionalism" narrative.

Conversely, the primary catalyst for IXUS is the continued diversification benefit from its broader mandate. As developed markets like Europe and Japan see their own policy tailwinds and earnings re-ratings, IXUS's exposure to these regions provides a natural hedge and a source of alpha. Its higher dividend yield and lower beta offer stability during periods when EM-specific risks emerge. The fund's lower cost and liquidity profile make it an efficient vehicle to maintain a core international position while the EM re-rating unfolds.

The portfolio implementation is clear. Use IXUS as a core holding for international diversification. Its lower cost, broader exposure, and higher income stream provide a stable, lower-friction platform for the majority of international allocation. Then, deploy IEMG as a satellite position for tactical EM exposure. Its higher liquidity and concentrated mandate allow for timely, efficient bets on the EM growth thesis, particularly in technology and financials. This two-tier approach leverages the strengths of both funds: the stability and diversification of IXUS as a foundation, and the conviction and liquidity of IEMG for targeted, higher-conviction bets on the emerging markets re-rating.