Morningstar Says Your Emerging Markets Fund and Your Value ETF Are Both AI Bets Now
Morningstar strategist Tom Lauricella says the funds retirees bought specifically to escape tech concentration have quietly filled up with the same AI bets they were meant to offset, and the shift happened faster than almost anyone noticed.
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Morningstar strategist Tom Lauricella delivered a warning that should stop any diversified investor cold: the emerging markets fund and the value ETF you bought to spread risk have both quietly become AI bets. Speaking on Morningstar’s Investing Insights podcast in an episode titled How AI Is Taking Over Your Portfolio, Lauricella walked through weightings that suggest diversification, as most retirees understand it, has stopped working.
Emerging Markets Turned Into a Semiconductor Trade
An investor near retirement typically holds an S&P 500 index fund, an emerging markets fund, and a value ETF. The EM fund was supposed to cushion U.S. tech risk, and the value exchange-traded fund was supposed to cushion valuation risk.
Lauricella’s figures scramble that. Semiconductors are now “about 16% of the U.S. stock market.” He said, “22% of your big emerging market indexes” now sits in “just a handful of companies, three or four companies,” anchored by Taiwan Semiconductor Manufacturing (NYSE:TSM | TSM Price Prediction). A quarter of an EM portfolio now rides the same AI capex cycle that drives Nvidia (NASDAQ:NVDA) in the U.S. index.
The pace of that shift should catch retirees off guard. “A year and a half ago or so, it would have been about half of that,” Lauricella said. A weighting that doubles in 18 months is more than a rebalancing event; it represents a fundamental change in the character of the fund. Alibaba (NYSE:BABA) is increasingly held for its AI cloud and compute story rather than its e-commerce business.
Value ETFs Are Half a Tech Fund Now
Lauricella said, “at the end of 2024, your typical value, some of the big value indexes would have had technology stocks at about 11% of the portfolio,” and “now we’re seeing some key value indexes at something like 20% technology.” Add the tech-adjacent names and “a lot of value ETFs … now have something like more than a quarter of their portfolio in tech and tech adjacent stocks.”
The most jarring figure is this: “Amazon is now the largest holding in the Russell Large value index at 6%.” Alongside Amazon (NASDAQ:AMZN) in most value indexes are Oracle (NYSE:ORCL) and Cisco Systems (NASDAQ:CSCO), both long classified as slow-growth dividend names and both now running AI infrastructure businesses. (We rounded up seven of these AI infrastructure suppliers, from power to networking, in a free report you can grab here.) Oracle’s cloud infrastructure revenue grew 121% year over year in Q1 FY27, per its most recent earnings release. That reads well outside a traditional value stock’s growth profile.
Even Berkshire Hathaway (NYSE:BRK-B) fits the pattern through its Apple stake and more recent Alphabet (NASDAQ:GOOGL) position. While the value wrapper stayed the same, the underlying exposure drifted.
Lauricella explained the mechanics. AI hardware growth has been so extreme that older tech leaders look cheap by comparison: “compared to something like the revenues that you’re seeing in SanDisk or Western Digital or Nvidia, Apple and Microsoft look like value stocks just because of where they are in the rankings.”
Active Managers Cannot Escape It Either
If the concentration were easy to dodge, Lauricella said, professionals would already be doing it. One T. Rowe Price emerging markets fund carries “some 33% in those three names.” Two Fidelity EM funds sit on opposite sides of the same bet. A Dodge & Cox fund is underweight, holding “just single digits in these … companies.”
The spread comes from the benchmark trap. “If you’re a portfolio manager and 22% of your index is in these three companies, four companies at most, then you have a very big decision to make,” he said. Underweight the AI names and risk lagging. Match them and inherit the concentration you were hired to manage.
Go Look at What You Actually Own
Lauricella’s practical suggestion is to go look at what you actually own. “Investors may want to peek and see what the percentages are in their emerging market funds.” Do the same for any value ETF in your portfolio.
Semiconductors are “historically very cyclical” and “even more volatile than just sort of general tech stock,” and several leaders carry “very high valuations.” The AI trade is already embedded in portfolios built to sidestep it. The useful first step is knowing by how much.
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Trey has been an editor and author at 24/7 Wall St. for more than a decade, where he has published thousands of articles analyzing corporate earnings, dividend stocks, short interest, insider buying, private equity, and market trends. His comprehensive coverage spans the full spectrum of financial markets, from blue-chip stalwarts to emerging growth companies.
Beyond 24/7 Wall St., Trey has created and edited financial content for Benzinga and AOL's BloggingStocks, contributing additional hundreds of articles to the investment community. He previously oversaw the 24/7 Climate Insights site, managing editorial operations and content strategy, and currently oversees and creates content for My Investing News.
Trey's editorial expertise extends across multiple publishing environments. He served as production editor at Dearborn Financial Publishing and development editor at Kaplan, where he helped shape financial education materials. Earlier in his career, he worked as a writer-producer at SVE. His freelance editing portfolio includes work for prestigious clients such as Sage Publications, Rand McNally, the Institute for Supply Management, the American Library Association, Eggplant Literary Productions, and Spiegel.
Outside of financial journalism, Trey writes fiction and has been an active member of the writing community for years, overseeing a long-running critique group and moderating workshop sessions at regional conventions. He lives with his family in an old house in the Midwest.
