Emerging markets are now an AI chip trade: Chart of the Day

Emerging market ETFs are increasingly tied to the AI chip trade as South Korea and Taiwan funds surpass China-focused funds in assets, pulling investors into the same global semiconductor cycle driving US tech. The shift means broad EM allocations now carry significant exposure to chipmakers like Samsung, SK Hynix, and TSMC, reducing diversification benefits from US tech.

Investors often buy emerging markets to get something different from the US stock market's biggest trades. That is getting harder. South Korea and Taiwan ETF assets have climbed over those of China-focused funds, according to Strategas ETF Research. That shift moves the center of gravity in emerging-market ETFs toward two of the world's most important semiconductor markets. China still matters. It just no longer owns the EM story the way it once did. For years, emerging markets were often shorthand for China, commodities, currencies, and faster-growing consumer economies outside the US. Now, a growing slice of the trade runs through the AI supply chain, pulling EM investors into the same global chip cycle driving US tech. South Korea brings Samsung 005930.KS https://finance.yahoo.com/quote/005930.KS/ and SK Hynix 000660.KS https://finance.yahoo.com/quote/000660.KS/ . Taiwan adds Taiwan Semiconductor Manufacturing TSM https://finance.yahoo.com/quote/TSM/ . Together, they make a broad EM allocation look less like a clean break from the US tech trade and more like another route into AI hardware. Investors have already been looking for ETF escape routes from crowded tech exposure https://finance.yahoo.com/markets/article/the-tech-trade-is-overcrowded-heres-your-etf-escape-route-chart-of-the-day-100000111.html . Emerging markets can still help, but the label is doing less work than it used to. This week's chip sell-off — the worst since early March — made that point harder to ignore. When semiconductor stocks slide, the pressure does not stay inside US chip ETFs. It can travel through country funds, broad EM funds, and anything tied to Korea and Taiwan. The second wrinkle is that not all EM funds own the same version of EM. The iShares MSCI Emerging Markets ETF EEM https://finance.yahoo.com/quote/EEM/ includes South Korea because MSCI classifies it as emerging . The Vanguard FTSE Emerging Markets ETF VWO https://finance.yahoo.com/quote/VWO/ excludes South Korea because FTSE classifies it as developed . That index difference leaves EEM with about 5 percentage points more semiconductor exposure than VWO, according to Strategas. Diversification is no longer just about adding an international ticker or an EM fund to a portfolio. It is about checking what is inside the wrapper. Emerging markets can still diversify a portfolio. In some funds, buying EM now also means buying the AI chip trade through yet another door. Jared Blikre is the global markets and data editor for Yahoo Finance. Follow him on X at @SPYJared or email him at jaredblikre@yahooinc.com. Click here for in-depth analysis of the latest stock market news and events moving stock prices Read the latest financial and business news from Yahoo Finance