The S&P 500’s top 10 holdings now account for roughly 35–40% of the index — a concentration level not seen in at least a decade. For investors benchmarked to U.S. large caps, that means portfolio performance is being driven by a narrow group of mega-cap names whose earnings contributions are lagging their market capitalizations.
In the latest episode of Lead-Lag Live, Derek Yan, Senior Investment Strategist at KraneShares, joined us to discuss why emerging markets — and EM technology in particular — may represent the most compelling diversification opportunity of this cycle. The conversation covered dollar dynamics, the global AI supply chain, and why advisors who remain purely U.S.-centric may be missing a structural shift already underway.
The core question: If the AI trade is truly global, why are most portfolios still acting like it’s a purely American story?
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The Concentration Problem
Derek opened with a striking observation: anyone holding the S&P 500 or NASDAQ 100 today has 35–40% of their equity allocation concentrated in just 10 names. That level of concentration is historically unprecedented over the past decade.
The deeper issue is that earnings contributions from those mega-cap names are lagging their market cap weight. In other words, the market is pricing in future earnings growth that must materialize — or valuations become unsustainable.
That creates a natural impetus for broadening — both within U.S. equities and, more importantly, internationally. Emerging markets offer lower relative valuations and lower correlation to U.S. equities, making them a genuine diversification lever rather than just a return-chasing rotation.
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The Dollar as Quiet Killer — and Potential Tailwind
Currency has been the silent drag on EM returns for the better part of a decade. A persistently strong U.S. dollar eroded foreign equity returns for dollar-based investors, making EM allocations feel like dead weight.
Derek argued that the policy setup is now shifting. The Trump administration has signaled a preference for a weaker dollar to support domestic manufacturing and trade competitiveness. The Federal Reserve appears increasingly willing to cut rates. Both monetary and fiscal policy are aligning toward dollar weakness.
Historically, EM equities have meaningfully outperformed during periods of dollar weakness. If the dollar enters a sustained multi-year decline, the currency tailwind alone could meaningfully enhance EM returns — before even factoring in improving fundamentals.
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Still Early in the Cycle
Emerging markets outperformed the U.S. in 2025 — something that hasn’t happened often over the past decade. Many investors dismissed it as a one-off. But Derek pushed back on that framing.
Even after last year’s rally, forward P/E ratios for many EM indexes remain in the low double digits, compared to 20–30x for U.S. benchmarks. Earnings revisions are improving, particularly on the technology side. And the structural catalysts — AI buildout, critical materials demand, China’s domestic AI ecosystem — are multi-year in nature.
He drew a parallel to the 2000–2008 EM bull market, when cheap valuations combined with improving fundamentals produced a sustained multi-year outperformance cycle. The setup today, he argued, looks remarkably similar — but with technology replacing the commodity supercycle as the primary driver.
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The Emerging Market Role in the AI Value Chain
When investors think AI, they think U.S. hyperscalers. Derek made the case that this view is incomplete — and potentially costly.
The U.S. dominates chip design. But the physical manufacturing, packaging, and memory infrastructure that makes AI possible is overwhelmingly concentrated in emerging markets:
• TSMC holds a near-monopoly on advanced chip manufacturing, with packaging technologies like CoWoS that give it a structural edge no competitor has matched.
• SK Hynix dominates high-bandwidth memory (HBM) production — the critical bottleneck for AI data centers — and is Nvidia’s most important memory supplier.
• China is building its own parallel AI ecosystem, from chip manufacturing to large language models, creating a second pole of innovation outside U.S. control.
• Critical materials and grid infrastructure needed to power AI buildout are disproportionately sourced from and built in EM economies.
Focusing only on U.S. equities means missing a significant portion of the AI picks-and-shovels opportunity. The supply chain is global. The investment allocation should reflect that.
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Technology and Commodities Are Converging
One of the more nuanced points in the conversation was Derek’s framing of EM investment cycles. In the 2000s, emerging markets were driven by China’s infrastructure buildout — railroads, highways, airports — which created a broad commodity boom. From 2015 to 2020, the driver shifted to domestic technology platforms in China, Southeast Asia, and South Korea.
Today, we’re seeing a convergence of both cycles. The AI buildout requires not just chips and software, but electricity, grid upgrades, and critical materials that face structural bottlenecks. Commodities are becoming technology-relevant. What looks like a traditional commodity play may actually be an AI infrastructure play in disguise.
That convergence is what makes this EM cycle potentially more durable than prior ones. It isn’t reliant on a single driver — it’s feeding off both structural technology demand and commodity supply constraints simultaneously.
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Portfolio Construction: Where KEMQ Fits
For advisors looking to act on this thesis, Derek highlighted the KraneShares Emerging Markets Consumer Technology ETF (KEMQ) as a direct vehicle for capturing EM technology and growth exposure.
KEMQ holds names like TSMC and SK Hynix alongside digital platforms and internet companies across China and Southeast Asia. It provides concentrated but differentiated exposure to the EM broadening trade — particularly around EM growth and EM tech.
Derek’s framing was straightforward: if you believe diversifying away from mega-cap-centric U.S. equity makes sense, your EM allocation should tilt toward where the structural growth is. And right now, that growth is in technology.
The tailwinds are multiple: improving fundamentals, cheap valuations relative to the U.S., a weakening dollar, and a global central bank easing cycle that favors growth equities with long-duration cash flows.
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Key Takeaways
• U.S. equity concentration is at historic highs, with the top 10 S&P 500 holdings accounting for 35–40% of the index — and earnings contributions lagging market cap weight.
• The U.S. dollar’s structural weakening, driven by both administration policy and Fed easing expectations, could be a powerful tailwind for EM equities over the next two to three years.
• EM valuations remain compelling at low-double-digit forward P/E ratios, even after outperforming the U.S. in 2025.
• The AI value chain is global — TSMC, SK Hynix, and China’s domestic AI ecosystem are critical links that purely U.S.-focused portfolios miss entirely.
• Commodities and technology are converging in EM, creating a potentially more durable cycle than prior single-driver booms.
• KEMQ offers direct, concentrated access to EM technology themes for advisors building global equity allocations.
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Why This Matters Now
Most Western investors remain overwhelmingly U.S.-centric. For 10 years, that has been the right call. But the conditions that supported U.S. dominance — a strong dollar, widening interest rate differentials, and contained EM growth — are shifting.
If AI buildout is genuinely global, if the dollar is entering a sustained weakening phase, and if EM earnings revisions continue to improve, then the diversification trade isn’t a one-off. It’s a regime rotation.
The question for advisors is not whether emerging markets deserve attention. It’s whether portfolios are structured to participate in what could be a multi-year outperformance cycle — or whether U.S. concentration risk remains the bigger, quieter danger.
Watch or listen to the full Lead-Lag Live episode for the complete discussion with Derek Yan.
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DISCLAIMER – PLEASE READ: This is a sponsored episode for which Lead-Lag Publishing, LLC has been paid a fee. Lead-Lag Publishing, LLC does not guarantee the accuracy or completeness of the information provided in the episode or make any representation as to its quality. All statements and expressions provided in this episode are the sole opinion of KraneShares and Lead-Lag Publishing, LLC expressly disclaims any responsibility for action taken in connection with the information provided in the discussion. The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.
