This Emerging Markets ETF Beat the S&P 500 for 16 Years. Could It Happen Again?

Some of the biggest gains from the U.S.-led artificial intelligence (AI) boom have been going to companies in other countries. Some of the world's best semiconductor stocks are in countries like Taiwan and South Korea. These countries are often categorized as "emerging markets" by international stock ETFs.

If you want to buy some of the world's leading AI chip stocks, the iShares MSCI Emerging Markets ETF (NYSEMKT: EEM) might be a good choice. It holds a portfolio of more than 1,100 international stocks in fast-growing economies beyond America.

Emerging markets stocks are often described as "risky" compared to U.S. stocks. But this emerging markets ETF has a track record of outperforming the S&P 500 index. Could it keep beating U.S. stocks?

Let's take a closer look at this international ETF and see why it might be worth adding to a long-term portfolio.

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iShares MSCI Emerging Markets ETF (EEM): 1,194 stocks, three years of 22.9% annualized returns

The iShares MSCI Emerging Markets ETF holds a portfolio of 1,194 large-cap and mid-cap stocks from emerging markets. More than 10 countries are represented in the fund, and the top five markets are:

• Taiwan: 27.8% of the fund
• China: 20.5%
• South Korea: 19.9%
• India: 11.6%
• Brazil: 4.1%

Taiwan and South Korea are home to some of the most in-demand tech stocks of companies that make semiconductors and AI memory chips. The fund's five largest stock holdings are household names to investors who follow the Asian AI trade: Taiwan Semiconductor Manufacturing, Samsung Electronics, SK Hynix, Tencent, and Alibaba Group. These five tech stocks make up about 33.4% of the fund.

During the past three years, this fund has delivered average annual returns of 22.9%, and an impressive 45.06% return in the past year, strongly outperforming the S&P 500.

Should long-term investors buy the iShares MSCI Emerging Markets ETF?

Investing in emerging markets stocks is not for the faint of heart. Countries with developing economies are sometimes viewed as riskier places for investors compared to the U.S., because they can be more vulnerable to global crises. For example, in the month following the outbreak of the Iran war in late February, the iShares MSCI Emerging Markets ETF lost about 13.5% of its value.

Emerging markets are also vulnerable to currency risk. If the U.S. dollar gets stronger compared to the currencies of countries like China, Taiwan and South Korea, this international ETF could lose value in dollar terms.

However, this ETF has previously outperformed the S&P 500 for an extended stretch. Starting with the fund's inception in April 2003, it outperformed the U.S. benchmark for the next 16 years, with a total return of 428% compared to 356.2% for the S&P 500.

EEM Total Return Level data by YCharts

This fund is not on the list of best emerging markets ETFs. It's somewhat heavily concentrated in a few major tech names from a short list of countries, and it charges a rather high expense ratio (0.72%). But if you believe that the future of the AI boom will deliver big returns to companies in Taiwan, South Korea, and China, this fund might be a better long-term bet than the S&P 500 -- and could be worth including in your portfolio.

Ben Gran has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Taiwan Semiconductor Manufacturing and Tencent. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.