Emerging Markets ETFs Gain Steam, but Choose Carefully

International equity ETFs saw a strong January for fund flows, as the group added $68.2 billion to assets under management (AUM), compared to a $42.7 billion increase in U.S. equity funds.

And emerging markets ETFs stood out within that group, with the iShares MSCI Emerging Markets ETF (EEM) picking up $4.1 billion in new investment (15% of the fund’s total AUM), while the iShares Core MSCI Emerging Markets ETF (IEMG) tacked on $8.8 billion (or 6.26% of AUM).

The strong flows towards international investments shouldn’t come as a surprise, given high valuations in U.S. stocks due to the outperformance of U.S. tech as a group. Carl Delfeld makes a compelling case for favoring international investments based on his “Great Rebalancing” thesis, and these flows are a natural extension of that.

But if you’re looking to scale up your exposure across the globe due to concerns about the rapid rise of the Magnificent 7 stocks and artificial intelligence more generally, you should probably stay away from the two funds mentioned above.

[text_ad]
There’s nothing “wrong” with the two funds. In fact, they’ve performed quite well this year, with each fund up 7.7% so far in 2026.

However, the funds are falling victim to something that’s currently plaguing many domestic funds. The outperformance of tech has made that sector such a large segment of the underlying assets that it’s now a concentration risk that you need to control for.

Concentration Risk in Emerging Markets ETFs

As you can see in the table, both IEMG and EEM (the emerging markets ETFs that saw the largest inflows last month) have double-digit exposure to Taiwan Semi (TSM) and very similar exposure to five tech companies that represent around one-quarter of total assets under management for each fund.

TSM, Samsung, and Alibaba (BABA) are likely names with which you’re already familiar, while Tencent is a Chinese tech conglomerate and holding company that plays in the video game, social media, e-commerce and fintech spaces.

SK Hynix, on the other hand, is a South Korean DRAM and flash memory supplier and one of the largest semiconductor companies in the world.

In other words, if you’re looking to branch out into the emerging markets to diversify away from some of your tech-heavy U.S. positions, these funds miss the mark.

In a scenario in which AI fails to translate hundreds of billions of dollars of invested capital into meaningful productivity gains for companies (i.e., is a bubble), these emerging markets funds won’t actually provide much of a buffer for your portfolio.

So, with that in mind, I took a closer look at nine other emerging markets ETFs in the hopes of identifying a few that will allow you to broaden your investment horizon while also providing some diversification away from technology stocks.

The first five (below) present the same (or a version of the same) risks as the funds above, primarily their high exposure to Taiwan Semi and electronic technology as a sector.

5 Emerging Markets ETF Alternatives to Ignore

I should note that none of these are outliers or investing contrary to their governing documents; they’re just limited by the same emerging markets landscape as the rest of the funds out there.

4 Emerging Markets ETFs to Diversify Away from Tech

Of the remaining four funds, DFEM and AVEM still have relatively high exposure to tech as a group, but the AI bubble risk is partially mitigated due to their lower concentration in TSM.

That said, if I were looking to add exposure to emerging markets but was already somewhat tech-heavy in my U.S. portfolio, I’d take a much closer look at FNDE and DEM.

Both funds are more heavily weighted towards financials (31.5% for DEM and 27.2% for FNDE) but have lower exposure to tech and limited exposure (or none in the case of DEM) to Taiwan Semi.

Neither of those two funds will fully insulate you from the fallout should the AI trade fall apart, but they can offer you some peace of mind if you’re worried about it.

[author_ad]