Should Investors Rethink the Role of Emerging Markets Equities in Their Portfolio?

Yes. Investors should reassess the role of emerging markets (EM) equities because benchmark concentration has reduced diversification benefits and increased exposure to the same artificial intelligence (AI)–driven forces leading developed markets. That does not weaken the case for EM. It changes it. Investors should be more deliberate about what role they want EM to play and how they gain that exposure. Active management and manager selection remain as important as ever.

Historically, EM has helped diversify developed markets (DM) portfolios by offering exposure to different countries, sectors, currencies, and growth drivers. That remains true in part, but less so at the benchmark level. EM indexes have become more concentrated, with a small group of Asian AI semiconductor companies now accounting for a meaningful share of the index. TSMC, Samsung Electronics, and SK Hynix represented about 28% of the MSCI Emerging Markets Index by weight, double their end-2024 share. 1 Those three companies have contributed roughly 69% of MSCI EM returns year-to-date. Similarly, the ten largest contributors to S&P 500 Index returns were AI-linked, accounting for roughly 64% of index returns. This dynamic has helped drive Taiwan and South Korea to account for nearly half of the MSCI EM Index (47%), more than the two largest EM economies, China and India, combined (33%). 2 Broad EM exposure therefore increasingly provides another route into the same AI buildout theme that has shaped DM leadership, rather than a clearly distinct set of return drivers or proportional exposure to EM economies. High index concentration, combined with strong retail buying and leveraged positioning, have exposed investors to greater volatility.

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