An Emerging Approach to Accessing Emerging Markets

Over the past year, global and U.S.-based investors have increasingly pivoted away from U.S. equities toward other developed and emerging markets. Given heightened volatility in the U.S., and calmer markets abroad, many investors have been revisiting their global asset allocation. This trend has persisted despite the recent performance rebound in the U.S. market.¹

For those U.S.-based wealth managers who may be unable to easily trade foreign securities directly, American Depositary Receipts (ADRs) are a practical means to gain international equity exposure without the usual trading and settlement burden. Since its launch in 2016, U.S. wealth managers seeking to build personalized, tax-efficient portfolios for their clients have been able to use the MSCI EAFE ADR Index to capture opportunities within developed markets outside the U.S.

The launch of the MSCI ACWI ADR Index broadens that opportunity set to include emerging markets. This new index aims to replicate the performance of large- and mid-cap companies in its parent (the MSCI ACWI Index) through ADRs traded on the New York Stock Exchange or NASDAQ. The ADR index covers over 70% of the parent MSCI ACWI Index by market cap and has had a tracking error of 1.1% to that same index.²

The index excludes ADRs with a 1-month frequency of trading below 80%. Where there are multiple ADRs for a constituent of the MSCI ACWI Index, the most liquid listing as measured by the 12-month annual traded value ratio (ATVR) is used. This helps ensure that the index considers liquidity as well as market exposure. The increased liquidity translates to lower trading costs for investors, as well as the ability to increase or trim a position more quickly.

What are the key trade-offs in using the MSCI ACWI ADR Index as the basis for global equity allocations compared with its parent index? The chart below compares the country allocations between the two indexes.  

Data from February 2022 to September 2025. We have excluded the U.S. from this chart, which had a 68% weight in the MSCI ACWI Index and a 63% weight in the MSCI ACWI ADR Index over the data period.  

The ADR index provides an equally broad country coverage, with only India and Korea showing a significantly lower representation. This is due to large names such as Reliance Industries Ltd. and Tata Consultancy Services in India, and Samsung Electronics Co., Ltd. in Korea not having ADRs.³

The ten largest MSCI ACWI Index constituents missing from the MSCI ACWI ADR Index are shown below:

Data as of Sept. 30, 2025. 

The MSCI ACWI ADR Index has broad coverage of sectors, with most sectors having an average drift of less than 0.5% from the MSCI ACWI Index since inception. On average, the ADR index is slightly underweight health care and financials by 0.8%, and overweight information technology.

The two indexes have very similar factor profiles, with the sole exception being a more significant exposure to large-cap stocks in the ADR index, because ADRs are typically issued by companies with larger market capitalizations.⁴

Data from February 2022 to September 2025. MSCI FaCS is a common language for defining and standardizing equity factors.

We’ve demonstrated the similarities of the MSCI ACWI ADR Index to its parent, but one of its main use cases is for direct indexing. When building client portfolios, wealth managers often use direct indexing to align client preferences while being able to harvest tax losses. Direct indexing involves holding the individual constituents of an index, rather than using an ETF or similar fund, to create a much larger opportunity set for loss harvesting. ADRs allow wealth managers to apply this technique to global equity exposures, without needing to trade non-USD instruments.

To illustrate, we consider a hypothetical high-net-worth client domiciled in the U.S. with a USD 10 million cash portfolio who seeks greater global equity exposure and a lower tax liability. The client wants to understand what trade-offs occur when harvesting tax losses.

To examine this, we test a loss-harvesting strategy that realizes capital losses while minimizing tracking error. Our analysis uses the MSCI ACWI ADR Index to track the MSCI ACWI Index. The loss-harvesting strategy is more aggressive in realizing losses, so we evaluate two versions — one with a turnover constraint and one with unconstrained turnover. For reference, we compare these two strategies to a tax-agnostic strategy that does not consider taxes during rebalances.

Tax-loss harvesting involves closing out positions in order to generate taxable losses. The more aggressive the loss harvesting, the more the portfolio will deviate from its benchmark, and as we shall see, the larger the impact on ex-ante tracking error (calculated via the MSCI EFMGEMLT risk model) and portfolio turnover.⁵ We first look at the losses generated by each strategy.

Data period: March 2022 to September 2025. The portfolio is rebalanced monthly without additional optimization constraints beyond jointly minimizing tracking error and taxes, or maximizing losses, as appropriate. The aim is to help assess potential loss-harvesting opportunities and their impact on other portfolio characteristics.

The unconstrained loss-harvesting simulation generated a maximum loss of just over USD 500,000 during one rebalance. In the first year of the analysis period, this translates to an improvement in the after-tax return for the unconstrained loss-harvesting strategy of almost 6% relative to the tax-agnostic strategy, but with turnover of 175%.⁶ This is due to market softening in the first year of our analysis period, which provides more loss-harvesting opportunities. With annualized turnover constrained to 40%, the after-tax return is improved by over 2%, with an annualized turnover of 27%. When turnover is constrained, the number of losses harvested each month is more consistent.  

Tracking error is about 20 bps higher on average for the loss-harvesting strategy. In our analysis period, the country exposure of the client portfolio was not impacted by either strategy.

U.S. wealth managers seeking exposure to emerging markets could use the MSCI ACWI ADR Index as a tool to offer that to their clients. Because the index is denominated in USD, wealth managers can use it in a direct-indexing strategy for tax-sensitive clients seeking global equity exposure without having to worry about currency conversions.

Given market movements during our study period, we found that loss-harvesting strategies realized significant taxable losses. However, managers may want to monitor the impact of loss harvesting on tracking error and turnover to ensure portfolios remain aligned with clients’ preferences and risk tolerances.