27 May 2026
Emerging markets have staged a remarkable comeback in recent years, outperforming many developed market benchmarks and attracting renewed investor attention. Yet a recent analysis from the CFA Institute suggests that investors may need to look beyond headline performance and reconsider what they are actually buying when they invest passively in emerging market indices.
According to the article, the composition of major emerging market benchmarks has changed significantly. What was once widely viewed as a diversified macroeconomic exposure to developing economies is increasingly dominated by a small number of large technology companies, particularly semiconductor and hardware manufacturers linked to the global artificial intelligence investment cycle.
The concentration is striking. The largest constituents of the MSCI Emerging Markets Index are now heavily tied to Taiwan and South Korea, with a handful of companies accounting for a disproportionate share of recent returns. As a result, passive investors seeking broad exposure to emerging economies may unknowingly be making a substantial allocation to a specific technology theme.
This shift raises important questions about diversification. Historically, emerging markets were often viewed as a way to gain exposure to domestic growth trends, demographic developments, currency cycles and structural economic reforms across a wide range of countries. Today, however, benchmark performance is increasingly influenced by the fortunes of companies connected to the global AI supply chain.
The article argues that this evolution has created a growing disconnect between the way many investors think about emerging markets and the reality of benchmark construction. While allocators may view emerging market equities as a broad macroeconomic asset class, passive index exposure increasingly reflects the performance of a concentrated group of technology leaders whose fortunes are closely tied to global semiconductor demand and AI-related capital expenditure.
Another consequence of this concentration is heightened exposure to the semiconductor cycle. Passive investors fully participate in the upside generated by AI-driven demand, but they are also vulnerable to any slowdown in investment spending, supply-chain disruptions or valuation corrections affecting the sector. Because passive strategies are tied to index composition, they have limited flexibility to adjust exposures as market conditions evolve.
This is where the article sees a potential role for active management. As emerging market indices become increasingly concentrated, active strategies may offer investors greater flexibility to allocate capital across countries, sectors and companies that are underrepresented in benchmark indices. The ability to move beyond index weights may be particularly valuable in a market environment where opportunities are becoming more dispersed and where domestic economic fundamentals are not always reflected in benchmark composition.
The analysis also highlights a widening gap between index performance and the experience of the average emerging market company. In recent years, a relatively small number of stocks have driven much of the benchmark’s gains, while a broader universe of companies has delivered more modest returns. This divergence reinforces the importance of understanding the underlying drivers of performance rather than relying solely on headline index results.
For members of CFA Society Italy, the article offers a timely reminder that portfolio construction begins with understanding what an index actually represents. As emerging markets evolve, investors may need to look beyond traditional labels and examine more closely the sources of risk, concentration and opportunity embedded within their allocations.