Emerging Markets Grapple with Concentration Risk Amid Geopolitical Unrest

Investors are increasingly allocating capital to emerging markets, driven by the pursuit of higher stock gains and a desire for diversification beyond the S&P 500. However, recent geopolitical events, such as the U.S.-Iran military conflict, have cast a spotlight on significant concentration risks within these markets.

The dependence of emerging market gains on a limited number of stocks, many of which are associated with the artificial intelligence (AI) boom, has become a key concern.

The iShares MSCI Emerging Markets ETF (EEM) has demonstrated robust performance, including a 29% increase in 2025 and maintaining a positive gain this year. Despite this strong showing, its underlying holdings reveal a substantial tilt towards Asia.

Asia's Dominance and Sector Concentration

Emerging market indices show a strong bias toward Asian economies, with China, South Korea, India, and Taiwan collectively representing over 75% of the index weight. Many of the leading stocks within this index are technology-focused, including giants like Taiwan Semiconductor and Samsung.

Malcolm Dorson, a senior emerging markets portfolio manager at Global X, emphasized this point on CNBC's "ETF Edge."

"The emerging markets index is approximately 80% Asia," Dorson stated, identifying this geographic tilt as a source of considerable concentration risk.

Furthermore, the technology sector alone accounts for over 30% of the overall EM index's weighting.

South Korea's Turbulent Week

South Korean stocks recently experienced extreme volatility. The market recorded its largest single-day decline on Wednesday, a downturn attributed to concerns about energy supplies to Asia amid the escalating conflict in the Middle East. This decline significantly impacted top memory sector stocks, which are vital to the energy-intensive processes of the AI boom.

The market subsequently rebounded sharply on Thursday, marking its best day since 2008. Despite this strong recovery, the iShares MSCI South Korea ETF (EWY) is still down nearly 13% for the week.

This recent volatility in South Korean stocks is partly linked to their exceptional performance in the past year and the substantial gains realized by retail investors. SK Hynix, a key holding in broad emerging market indexes, surged by 274% last year, while Samsung gained 125%.