How Bi-Modality Is Percolating Up Into Macro Markets

Today’s Stocks Money Markets How Bi-Modality Is Percolating Up Into Macro Markets By Vineer Bhansali , Contributor. Forbes contributors publish independent expert analyses and insights. Vineer Bhansali is the Founder and CIO of LongTail Alpha, LLC Follow Author Aug 05, 2026, 04:29pm EDT --:-- / --:-- This voice experience is generated by AI. Learn more . This voice experience is generated by AI. Learn more . Last month in this forum I alluded to “canaries” in the coalmine (see here ) , referring to the high implied volatility on options of stocks like Micron (MU) and SpaceX (SPCX). One working hypothesis was that assisted by leverage (both direct and via ETFs that provide this leverage) the market is currently amplifying “bi-modality”, which basically means a schizophrenic pricing of return outcomes that differ significantly from each other- akin to the outcomes of a coin flip.

The high implied volatility for these stocks, we think, can be explained by simply observing that the expected returns in a “good” state (melt-up) and a “bad-state” (melt-down) are very different. Say something like +200% in a good state and -50% in a bad state. More importantly for investors, such canaries usually signal something more consequential and larger than a few single stock curiosities. They can be precursors to macro behavior, and start to influence, albeit indirectly, the global economy that clearly is levered up to the stock markets. An inkling of this phenomenon has already begun to start showing up.

As my colleague Linda Chang illustrated in the chart below, the implied volatility of the emerging markets ETF EEM (iShares MSCI Emerging Markets ETF) has suddenly spiked up relative to the implied volatility of the US large cap ETF SPY (State Street SPDR S&P 500 ETF Trust). The last time the ratio of the two implied volatilities was in this region (not shown) was just before the tech crash of 2000. Ratio of EEM to SPY Volatility LongTail Alpha, Bloomberg We can trace this observation back to our canaries. Since the holdings of every ETF have to be disclosed by regulation, we can poke inside them: the three largest holdings of the EEM ETF are: TSMC (Taiwan Semiconductor), Samsung and SK Hynix. The first is the market leader in chip fabrication, and the other two are leaders in memory, which is the hot commodity given the requirements of AI models that have to load them up in their “brain” to answer our most random queries in real time.

Interestingly, the EEM ETF has an exposure of almost 27% to Taiwan, and 20% to South Korea. All the other “emerging markets”, including the next largest, China (at about the same weight ~ 21% as South Korea), make up the rest (all data from Bloomberg as of August 4, 2026). I don’t have to remind the readers that these three stocks, and the stock markets they belong to, have been on a tear recently. And they have not lacked for volatility – the trailing volatility of Taiwan has been in the 50% annualized range, and that of the Korean market has been close to 100%!

So we can see that the exploding volatility of the EEM, and emerging markets broadly, is a function of the exploding volatility of our canary stocks, that, for better or worse, are levered plays on AI. Interestingly, the other large EM ETF (almost 5x the size of EEM) is Vanguard’s VWO (Vanguard FTSE Emerging Markets ETF), but it has almost no exposure to Korea or to two of the three stocks in the EEM. Not surprisingly, its volatility (both realized and implied), is a fraction of the volatility of the EEM. Different strokes… MORE FOR YOU The consequences for investors are quite apparent. Since both EEM and VWO are benchmarks of sorts for emerging market equities, if one wants a higher volatility version, one can buy the EEM. On the other hand, if one wants a lower version, one can buy the VWO. Now why would one ever want a higher volatility version (i.e. EEM) than a lower volatility version (VWO)? The answer is similar to the one when asking the questio...