Latin America Emerges as a Potential Diversifier for Investors Amidst Emerging Market Volatility

Investors have significantly increased their allocations to emerging markets in recent years, driven by the pursuit of substantial stock gains and the desire for diversification beyond the highly concentrated U.S. market, particularly the S&P 500. However, recent geopolitical events, specifically the U.S.-Iran military conflict, have cast a spotlight on the inherent concentration risks within emerging markets, where substantial gains are often tied to a limited number of stocks, many of which are linked to the artificial intelligence boom.

The iShares MSCI Emerging Markets ETF (EEM) has demonstrated robust performance over the past few years, extending into 2026 with a 29% gain in 2025 and maintaining a modest increase this year. Despite this performance, the ETF’s holdings remain heavily skewed towards Asia, with over three-quarters of its index weight allocated to China, South Korea, India, and Taiwan. A significant portion of these top holdings are technology-focused companies, including Taiwan Semiconductor and Samsung.

Malcolm Dorson, senior emerging markets portfolio manager and senior vice president heading the active investment team at Global X, highlighted this concentration risk on CNBC’s "ETF Edge." He stated that the emerging markets index is "still roughly 80% Asia," which translates to a considerable concentration risk for investors. The broader emerging markets index also carries a significant weighting in the technology sector, exceeding 30%.

South Korean stocks have experienced extreme volatility this week. The market recorded its worst single-day decline on Wednesday, a reaction to escalating tensions in the Middle East and the potential impact on energy supplies to Asia. Many top stocks in the memory sector, which are crucial for the AI boom and rely on energy-intensive processes, are particularly vulnerable to such disruptions. Following its worst day on record, the South Korean index saw a significant rebound on Thursday, achieving its best day since 2008. Despite this recovery, the iShares MSCI South Korea ETF (EWY) has seen a decline of nearly 13% this week.

A portion of the extreme volatility observed in South Korean stocks can be attributed to their recent strong performance, which has led to substantial gains for many retail investors. For instance, SK Hynix, a prominent holding in broad emerging market indexes, surged by 274% last year, while Samsung experienced a 125% increase in its stock value.

The U.S.-Iran military conflict has triggered a substantial surge in oil prices, impacting global markets. Brent crude futures surpassed $90 on Friday, with U.S. West Texas Intermediate crude futures nearing that mark. This represents an increase of over 30% for WTI and nearly 26% for Brent crude this week.

The resulting energy squeeze has led to significant reactions in Asia. China has reportedly instructed its domestic oil refining companies to suspend all exports of diesel and gasoline. Energy market experts suggest that other Asian nations may adopt similar measures to preserve their energy stockpiles.

Despite these challenges, ETF investing strategists maintain that it is not yet time to abandon emerging markets. Certain macroeconomic factors are expected to support outperformance in these markets over the long term. Dorson advocates for a "barbell approach" to investment strategy, emphasizing a balanced exposure across different types of emerging markets rather than concentrating on a single region. He suggests that investors seeking international exposure should consider Latin America as a counterbalance to Asian markets.

Dorson believes that a diversified approach is essential, stating, "I think you need to have both." Countries such as Argentina, Brazil, and Colombia are closely linked to energy and commodity markets, and rising oil prices could provide an additional boost to their economies. He estimates that "25 to 33% of the story should be that attractiveness of getting exposure to commodities." Furthermore, ongoing political reform efforts in Latin American nations are seen as potential tailwinds for their economies. Dorson noted that "All eyes are on political change that could drive fiscal reform," which could benefit financial services sector stocks throughout the region.

Equities in several Latin American markets also trade at significant discounts compared to U.S. stocks. Many of these markets exhibit price-to-earnings ratios that are approximately half of those found in the S&P 500. For example, Vanguard’s S&P 500 ETF (VOO) currently trades at a P/E ratio of 28, while its emerging markets ETF (VWO) trades at a P/E ratio of 18.