An emerging story: the semiconductor boom and its index implications

To assess the implications of the semiconductor boom, it is useful first to examine the construction of the MSCI Emerging Markets (EM) Index using a free float-adjusted market capitalization (FFAMC) methodology.

Under this approach, MSCI calculates a company’s FFAMC by taking its investable market capitalization and applying the Foreign Inclusion Factor (FIF), which reflects the proportion of shares available to foreign investors.

This adjustment is particularly relevant in emerging markets, where strategic ownership, government holdings, controlling shareholders, and foreign ownership restrictions can limit the portion of listed shares accessible to international investors.

Individual constituent weights are then determined by comparing each stock’s FFAMC against the aggregate FFAMC of the index. Country weights are derived from the sum of each country’s constituent-level FFAMC relative to the total index market capitalization.

This methodology can leave the index vulnerable to significant concentration when a group of companies materially outperforms the broader benchmark. The recent semiconductor rally has increased the market capitalizations and FFAMC of several large constituents, thereby increasing their respective weights in the MSCI EM Index.

Semiconductors shaping emerging markets

As of August 21, 2026, the MSCI EM Index had a FFAMC of $12.36T, [CJ1.1]with three semiconductor-related companies representing a substantial share of the benchmark: Taiwan Semiconductor Manufacturing Company (TSMC), Samsung Electronics, and SK Hynix.

Together, these companies account for more than 28% of the index. Their influence also contributes to sizable country weights, with Taiwan at 26.8%, South Korea at 21.2%, and China at 20.8%, collectively representing nearly 69% of the overall index. Taiwan and South Korea generally have higher effective investability than China, playing a role in their index weights relative to the size of their economies.

This marks a notable shift from five years ago. Although the index was then heavily weighted toward China, concentration at the individual-security level was lower, with no single holding representing more than 6.5% of the benchmark. Since then, China’s index weight has declined significantly, while TSMC has become an increasingly dominant constituent.

Implications for passive and active managers

For passive investors, the implications are largely mechanical. A passive strategy designed to track the MSCI EM Index must replicate the benchmark’s constituent weights. If TSMC rises from 10% to 15% of the index due to share-price appreciation, the manager’s required exposure increases in line with the benchmark, and new inflows must be allocated at the higher weighting. In most cases, the increase in exposure occurs organically as the security appreciates within the portfolio.

For active managers, the chip stock rally presents a more complex portfolio construction challenge. While active managers are not required to hold benchmark constituents at index weights, the larger the securities’ weightings become, the more consequential it is to be underweight.

• For example, assume TSMC represents 10% of the index, but an active manager believes the valuation is excessive and allocates only 5% of the portfolio to the stock.

If TSMC subsequently rises to 15% of the index, the manager’s underweight position becomes more pronounced and may result in meaningful relative underperformance. Active managers must therefore decide whether to increase exposure despite valuation concerns or maintain their position and accept greater potential for tracking errors.

A second challenge can emerge in a momentum-driven market when a fund is subject to single-name concentration limits. If a fund limits exposure to any individual security at 10% and TSMC appreciates from 10% to 15% of the portfolio, the manager may be required to reduce the position. Although this crystallizes profit and loss (PnL), it may also constrain the fund’s ability to participate in further upside, even if the portfolio manager remains bullish on TSMC.

The same dynamics would operate in reverse during a semiconductor correction. If semiconductor stocks underperform and their index weights decline, passive funds would see their exposures fall with the benchmark and new inflows would be allocated at lower weights. Active managers that had maintained underweight positions would likely benefit on a relative basis, assuming the underweights were concentrated in the securities most affected by the downturn.

Conclusion

The semiconductor boom has materially altered the composition and profile of the MSCI EM Index. Although the benchmark is designed to represent approximately 85% of the FFAMC in each EM-classified country, its current composition has become increasingly influenced by a narrow group of semiconductor-related companies.

• For passive managers, this concentration is a structural feature of benchmark replication and must be reflected in portfolio exposures.
• For active managers, it creates a more difficult trade-off between valuation discipline, benchmark awareness, and tracking-error management. As semiconductor weights increase, deviations from the benchmark become more consequential; if the rally continues, underweight positions may be costly, while in a reversal they may provide meaningful relative protection.