AI Stocks Power Best Emerging Market Fund Returns Since 2017

Key Takeaways

• Emerging market stock strategies are on track for their best year since 2017, largely thanks to the AI boom.
• Taiwan Semiconductor, Alibaba, and Tencent have led gains in key emerging market indexes.
• As with the US stock market, heavy weightings in AI-related stocks highlight concentration risk.

After a long period of underperformance, emerging market stock funds are on track for their best year in nearly a decade, led by the same trend that has powered the rally in the US stock market: the artificial intelligence boom.

The largest emerging market fund, the $141 billion Vanguard FTSE Emerging Markets ETF VWO, is up 23.5% so far in 2025—its best return since 2017, when it rose 31.4%. The second-largest fund, the $117 billion iShares Core MSCI Emerging Markets ETF IEMG, has gained 30.2% this year—also it’s best showing since 2017. Overall, the average diversified emerging market stock fund has gained 27.2% in the year to date. Meanwhile, US stocks—represented by the $693 billion SPDR S&P 500 ETF SPY—are up 17.1%, and the $2.1 trillion Vanguard Total Stock Market ETF VTI

Key AI-related stocks in Taiwan and China have been leading the charge among emerging market stocks. That includes Taiwan Semiconductor Manufacturing TSM, which is up 47.2%, and Alibaba Group Holding BABA, up 97.1%.

Chetan Sehgal, portfolio manager at Templeton Emerging Markets Investment Trust, explains that the AI boom has helped investors overcome their fears over tariffs, which in April looked set to fall hard on Asian countries. “Trade policy uncertainties are fading, and emerging markets have taken a more conciliatory approach, seeking trade diversification while limiting the fallout from tariffs. The anticipation of tariff-related economic slowdown has collided with fast developments in AI,” he says.

However, the AI trade has also led to a growing concentration risk in key benchmarks, just as it has within the US stock market.

Tech Stocks Driving Emerging Market Gains

2025’s rally bring a welcome break from a long-term trend of underperformance for these funds. The average emerging market stock fund has returned 4.9% per year over the last five years, while the average large blend stock fund is up 13.1% per year. Over the past decade, emerging market stock funds have returned an annualized 7.3%, while large blend funds are up 13.0% per year.

In many years, the biggest drivers of returns in emerging market stocks are macroeconomic factors, such as interest rates and currency swings. Over the long term, elements like government stability, regulation, and fiscal policies have determined the trajectory of these stocks.

This year, emerging market stock funds have gotten a boost from investors looking to diversify their portfolios away from the US market. The returns on these stocks would have been even greater for US investors were it not for a decline in the value of the US dollar, which eroded profits from stocks denominated in other currencies.

The primary fuel for the rally has been the same one driving the US stock market: the AI boom. For example, the biggest contributors to the Vanguard FTSE Emerging Markets ETF have been Taiwan Semiconductor, Alibaba, and Tencent TCEHY, which is up 51.4%. Taiwan Semiconductor is building custom chips for ChatGPT owner OpenAI, while Tencent and Alibaba are developing their own large language models to interact with users. These are the three biggest constituents in the ETF, which tracks the FTSE Emerging Markets All Cap China A Inclusion Index. Taiwan Semiconductor makes up 10.5% of the portfolio, Tencent is 4.7%, and and Alibaba is 3.4%.

It’s a similar story for the iShares Core MSCI Emerging Markets ETF, which also counts Korea’s Samsung Electronics 005930 as a top holding, clocking in at 2.8% of the porfolio.

The AI Concentration Risk in Emerging Market Funds

The big rallies in AI stocks have also brought increased concentration. At the end of 2022, Taiwan Semiconductor, Tencent, and Alibaba had a combined weighting of 13.4% in the Vanguard FTSE Emerging Markets ETF, which has now grown to north of 18.0%. That risk has played out in recent weeks as some of the wind has come out of the AI trade’s sails. Since the start of November, Taiwan Semiconductor has fallen 4.2%, and the Vanguard FTSE Emerging Markets ETF has dropped 1.3%.

Still, some fund managers see the trend continuing to boost AI stocks. “We are looking to take advantage across all parts of the AI value chain, remaining invested in the hyperscalers and chip manufacturers, but also finding value among those underlying cheaper beneficiaries that are just starting to catch up,” says Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International.