Introducing An Emerging Market ETF That Excludes China

By James Eugene

Looking to gain exposure to emerging markets while simultaneously avoiding China? Well you’re in luck. Emerging Global Advisors have launched a new emerging market exchange traded fund (ETF), the EGShares EM Core ex-China ETF (XCEM), that has one unique feature: the complete exclusion of the world’s largest emerging market, China.

Emerging market ETFs have been hemorrhaging cash since the start of the year. In fact, the three major ETFs – iShares MSCI Emerging Market ETF, MSCI Emerging Market ETF and Vanguard FTSE Emerging Market ETF – have all shed up to 20% of their values since the beginning of the year. The crash in China’s market was to blame for the slump and it has been reported that emerging market ETFs experienced $9bn worth of outflows in August.

Key Features

Country and sector allocations for the EGShares EM Core ex-China ETF

As mentioned, the new ETF has zero exposure to China as well as Hong Kong. The lack of stocks from these two countries has not had a negative impact on the diversity of the ETF however as the fund captures 97 large and mid-cap companies, spanning across 20 difference emerging markets. South Korean stocks are prominent in the fund, comprising of just over 18%, while Taiwan’s, Brazil’s and India’s stocks also boast a significant share in the XCEM. Colombia, Peru, Czech Republic, Hungary and Pakistan are on the other end of the spectrum and each comprise of less than 1% of the fund.

Heavy allocations can also be found in the financial, information technology, industrial and consumer discretionary sectors, with all four of these sectors making a grand total of just over 65%. Samsung Electronics is the largest company allocation and accounts for 4.4% of the fund.

The XCEM has been designed to track the EGAI Emerging Markets ex-China Index, which “measures the stock performance of up to 700 emerging market companies, excluding companies domiciled n China and Hong Kong”, according to the fact sheet.

The fund levies a 0.35% net expense ratio.

Are there any other ETF’s that exclude China?

Indeed. Emerging Global Advisors launched the EGShares Beyond BRICs ETF that excludes, as the name suggests, Brazil, Russia, India and China, as well as Taiwan and Argentina. As a result, South Africa is the largest constituent in the index, followed by Mexico, Qatar and Malaysia. There is a 75:25 split between emerging and frontier markets as the index is market captilisation weighted. Compared to the ex-China ETF, this particular fund has less emphasis on East Asian countries and boasts a dividend yield of 3.56%.

EGShares Beyond BRICs Performance

It’s recent performance hasn’t been great, however. Like other emerging markets, strong reliance on China, oil prices and anticipation of US interest rate hikes has caused the ETF to lose around 25% of its value this year. The South African rand and Turkish lira have hit all time lows this year, while other emerging and frontier market currencies haven’t been performing well this year, adding to the reasons why the ETF has suffered this year.

Who is the ETF Suitable for?

EGA President Robert Holderith stated that the objective of the XCEM is to “deliver core emerging market exposure independently of China, giving investors an option to refine their portfolios in light of other China holdings or market developments”.

The XCEM is mainly suited to those who either want to take a very conservative approach to China or just want to completely ignore it altogether. Many may argue that it is a strange idea to completely avoid one of the world’s largest economies, but with weak (or weakening) macroeconomic data not helping China at all, it is understandable why many are highly cautious about investing more money into the nation.

This point raises a question: is this ETF good for the long term? The answer is dependent on what type of investor you are. This ETF will provide investors with the opportunity to have full control over their exposure to China. It is also interesting to find that some investors prefer to ride the volatility in other emerging markets that analysts would deem more risky (such as Brazil) compared to China. It is safe to say that investors that tend to be very adverse to risk may not find emerging markets compatible with their investment goals.