Key TakeawaysThanks to huge rallies in semiconductor stocks, emerging market indexes are seeing significant concentration in a few names.The current concentration exceeds that of previous episodes, which were followed by large selloffs.Some emerging market managers are looking to diversify away from the largest-weighted stocks.The big risks investors usually associate with emerging markets are defaults, inflation, and currency runs. Now comes concentration risk, wherein a handful of stocks account for outsized portions of fund portfolios and returns. Concentration in a relatively narrow number of stocks has been in the spotlight for several years in the US market. But in emerging markets, massive gains in key semiconductor stocks have altered the landscape significantly over the past year. The top three stocks in the Morningstar Emerging Markets Target Market Exposure Index —Taiwan Semiconductor Manufacturing TSM, Samsung Electronics 005930, and SK Hynix 000660—now make up 26.7% of the benchmark. Over the past year, these stocks, which are booming thanks to the artificial intelligence buildout, have been responsible for roughly 57% of the index’s 30.3% return. When Samsung and SK Hynix turned and fell sharply starting in late June, they were responsible for a similar chunk of the index’s 6.8% loss.The net result is that investors seeking exposure to the growing economies of the developing world are instead seeing returns driven by the same AI theme dominating the US stock market. “Investors may think they are getting broad exposure to the developing world, but in practice, they are getting a very large allocation to Taiwan, China, South Korea, and India, with a huge semiconductor engine inside it,” writes Paul Choi, a non-US equity investment consultant in Callan’s global manager research group. “That is a double layer of concentration.”The Big Stock Gains Feeding EM ConcentrationDriving this extreme concentration are the huge gains posted by AI-related stocks. Over the past year, TSMC is up 96%, Samsung is up 258%, and SK Hynix is up 456%. Meanwhile, stocks that had been leaders in the past are now laggards. That includes Chinese tech and entertainment company Tencent, which accounts for 2.96% of the Emerging Markets Index, down from an average 3.87% weighting over the past five years. Five years ago, “the AI capex names of today sat toward the bottom … with returns driven primarily by consumer electronics such as PCs, smartphones, gaming, which is a far more cyclical driver,” says Morningstar manager research analyst Michael Born.China has also broadly lagged since the pandemic, as its growth cooled amid a real estate crisis and deleveraging. And while China is a major player in AI, many of those stocks are listed in the A-share market, which offers limited access to foreigners.Prior Rallies and SelloffsThis isn’t the first episode of significant concentration in this sphere. In a report published in June, Neuberger Berman emerging markets portfolio managers Vera German and Juan Torres looked back at similar circumstances over the last 20 years. There was the 2010-11 commodity supercycle, when the top 10 was dominated by resources, the 2014-15 China cycle, which included Tencent, and the 2020-21 China tech boom, dominated by Alibaba BABA and Tencent. However, the current emerging market concentration is more extreme than any of those previous episodes. During the China tech boom, the top 10 holdings of the MSCI Emerging Markets Index accounted for a 28% weighting. As of early June 2026, the top 10 stocks have a 39% weighting in that index.The Neuberger managers note that significant selloffs followed these episodes. In 2014-15, for example, the index would later lose 35% of its value. “Being part of the crowd may offer temporary comfort,” they wrote. “But history’s lesson is not simply that extreme concentration ends, it is that it can end sharply.” To be prepared, investors would “need to be positioned away from the largest index components. In the same way as they have led the gains this year, they could lead the losses.”Managing EM Concentration RiskTypically, concentration makes it harder for active managers to outperform as weightings grow. In June, 31% of US large-cap blend funds outperformed their asset-weighted passive peers in the Morningstar Active/Passive Barometer. Similarly, 33% of global large-blend funds outperformed.That doesn’t hold for emerging markets funds, where 70% beat their passive peers. That’s because portfolio managers have used other strategies, including an average 7% underweight to China. And while active managers often trim positions as they rise, in this case, many have leaned into the momentum of AI names in emerging markets. “Since the earnings and order book momentum behind these names still looks intact, managers have largely been happy to ride the wave,” says Morningstar’s Born.Still, some managers are wary. “It’s time to dampen concentration risk,” says Mark Headley, executive chairman of the investment firm Matthews Asia. “It doesn’t mean you want to sell off your TSMC or run away from names in AI tech innovation, but to look at areas that have been neglected. Chinese financials are extremely cheap.”Headley adds that the correction in June and July “has generally encouraged us that the markets are starting to broaden out.” In Korea, for example, “we are seeing local investors are starting to invest in smaller-cap names.” One Matthews favorite is Cosmax 044820, a small-cap cosmetics producer. Headley is “starting to nibble in ASEAN and taking a very hard look at India.” Meanwhile, he’s still committed to the tech sector and “some names that we believe fell too much in the recent selloff.”The Neuberger managers are also looking at parts of the emerging markets universe that have been left behind. “Virtually all the market’s attention is centered around one sector, one trade, two countries, and a handful of companies,” they said in response to an email question. “As such, we believe the opportunity set is currently extremely rich: from consumer discretionary in Mexico, to special situations in the mid-cap space in South Korea, distressed mining in Brazil, small caps across ASEAN, and China.”