Simplicity in investing is almost always an illusion

Published in The Sunday Times on 19th July 2026.

As an investor, you have choices.

If you enjoy analysing businesses and are comfortable valuing companies, you might decide to pick stocks yourself. If you want to stay involved but lack the time—or perhaps the inclination—to do the analysis, you can delegate that responsibility to an active fund manager. And if you have neither the time nor the expertise for stock or manager selection, passive investing offers an appealing alternative.

You decide you want to invest in emerging markets. That, in itself, is an active decision. But beyond that, you have no desire to pick individual stocks or back a particular manager. You simply want broad exposure to the asset class at the lowest possible cost.

Two of the leading providers in the passive space, Vanguard and BlackRock (through iShares) offer ETFs which seem to fit the bill. Both are keenly priced at 0.17% and 0.18% respectively. Both do an admirable job of tracking their benchmarks. The funds look virtually identical, so you opt for Vanguard's product and save yourself a basis point in annual fees. 

Twelve months later, you're delighted. Your investment has returned almost 26% in euro terms (to end June 2026). But you read an article about Emerging markets returning almost 50% in the last twelve months and are naturally perturbed.

While BlackRock’s iShares Core MSCI Emerging Markets ETF returned over 47% in the 12 months ended June 30th, Vanguard’s ETF only managed just over half that during the same period.  

South Korea is the main source of difference 

As it turns out, it comes down to Korea, where an AI-driven rally in Samsung and SK Hynix fuelled a more than 170% surge in the country’s benchmark Kospi index during the period. The iShares ETF tracks the performance of MSCI’s emerging-market benchmark, and because the index provider continues to classify South Korea as an emerging market  the iShares fund is capturing those returns.

By contrast, the Vanguard FTSE Emerging Markets ETF tracks a FTSE Russell emerging-markets index that doesn’t include Korea, because that provider considers the country a developed market.

These are high class problems – nobody lost money – you just didn’t make as much depending upon which ETF you chose. But there are at least two important issues here for investors to consider.

Firstly, passive is not the opposite of active. There has been a massive shift into passive and out of active over the last ten to fifteen years. Much of it justified by the poor persistence of active performance and lower fees.

Investors often frame the choice as active versus passive. But that's a false dichotomy. Passive investing is not the absence of active decisions; it is the outsourcing of them – in this case to a committee and a rulebook. I’ve been a consistent promoter of passive investing for many years– but I don’t treat this as an ideology. Passive is a tool - a very efficient one. But it needs to be treated with almost as much care and attention as allocations to active.

Concentration in EM would make the US stock market look balanced 

Secondly, set-and-forget investing in an era when market concentration can skew returns is potentially dangerous. 43% of the MSCI EM index is made up of technology stocks of which approximately 30% is in just 3 companies which are a single bet on the AI theme. That’s a level of concentration that makes the US stock market look balanced by comparison.

Investors ignore the obscure and focus on what is easy

The obvious difference between the two ETFs was one basis point of fees. The critical difference was an obscure index construction decision that most investors would never have considered. This is true across investing. Investors tend to focus on what is easy to observe and ignore the more obscure.  

As Matt Levine of Bloomberg observes, the less interesting classification question here is: “Is Korea a developed market or an emerging one?” The more interesting question is: “Do I want AI-exposed memory chip stocks in my emerging markets allocation or not?”. After the extraordinary run that technology has had in the last twelve months, this is the more practical question to consider. 

It’s a far more difficult question to debate but ultimately the more consequential one. 

Simplicity is one of the most seductive ideas in investing. Buy the market, keep costs low and let compounding do the heavy lifting. There is enormous wisdom in that approach. But simplicity in investing is almost always an illusion. The real lesson is not about Emerging Markets at all. It is that investment outcomes are often shaped by details most investors barely notice. 

Don’t confuse familiarity with understanding. The market has a funny way of exposing inexperience. If you neither have the time nor the expertise to invest you should seek advice.

Source: Data is sourced from Bloomberg as at market close 31st December, returns are based on total indices in local currency terms, unless otherwise stated.

Gary Connolly is Investment Director at Davy. He can be contacted at gary.connolly@davy.ie or on X at @gconno1.