In recent years, investors have increasingly channeled funds into emerging markets, moving beyond the concentrated S&P 500 in search of significant stock gains and diversification. However, the military conflict between the U.S. and Iran has shifted the focus towards the risks associated with emerging market investments, particularly those reliant on a small set of stocks, many linked to the burgeoning AI sector.
The iShares MSCI Emerging Markets ETF (EEM) has delivered robust performance, marking a 29% increase in 2025 and maintaining modest gains this year. Despite this, the ETF's holdings are predominantly centered in Asia, with China, South Korea, India, and Taiwan accounting for over three-quarters of its index weight. Many leading stocks in this index, such as Taiwan Semiconductor and Samsung, are tied to technology.
Malcolm Dorson, senior emerging markets portfolio manager at Global X, noted in a recent CNBC 'ETF Edge' segment that the emerging markets index is still largely Asia-centric, contributing to significant concentration risk. The overall EM index now has over 30% of its composition in the tech sector.
This week, South Korean stocks experienced significant volatility. On Wednesday, the market recorded its largest single-day drop amid rising concerns over energy supplies due to Middle Eastern conflicts impacting Asia. Many memory sector stocks driving the AI boom depend on energy-intensive processes. However, the South Korean index rebounded sharply on Thursday, achieving its best performance since 2008. Despite this recovery, the iShares MSCI South Korea ETF (EWY) remains down nearly 13% for the week.
This stark volatility in South Korean stocks is partly linked to their recent strong performance, which has resulted in significant gains for many retail investors. Notably, SK Hynix, a major component of broad emerging market indexes, soared by 274% last year, while Samsung rose by 125%.