Highly ordered lateral composition modulation (LCM) is obtained in InAs/AlAs short-period superlattices (SPS) grown by molecular beam epitaxy and its effect on photoluminescence (PL) is studied. The formation of LCM and modulation length can be resolved by x-ray diffraction. Furthermore, atomic-resolution scanning transmission electron microscopy results reveal both the composition and strain distribution in the modulated and unmodulated samples and demonstrate a clear transition of strain redistribution due to LCM formation, showing that LCM is a preferential route over dislocation formation for strain relief in these strain-compensated SPSs. The LCM leads to a large redshift in PL emissions up to 0.3 eV, which we attribute to the In-rich regions in the modulated InAs/AlAs SPS. This finding facilitates a deeper understanding of these modulated SPSs.