The China factor is becoming increasingly topical re: emerging markets investing, mostly in terms of how to minimize exposure.
The subject was in the news again this week when Palantir CEO Alex Karp told CNBC: “If you want to work in China or in any other country that is adversarial … you should disclose it and defend it.”
Don’t hold your breath, but investors are surely thinking about how and when to separate China holdings from emerging markets holdings overall. There are sound reasons for doing so, and not solely because of shifting geopolitical sentiment. Carving out a separate allocation to China and emerging markets ex-China also offers greater rebalancing flexibility.
Fortunately, there are several possibilities for implementing a separation in EM mandate. Several dedicated US-listed China ETFs are available, including the iShares MSCI China (MCHI) and SPDR S&P China (GXC), each offering a particular flavor of the country’s large-cap equities. (There are many other ETF choices to slice and dice China stocks. For laundry list of possibilities, see this list at ETFdb.com.)
The EM ex-China niche, by contrast, is a relatively small club. The main choices:
FMQQ The Next Frontier Internet (FMQQ)
KraneShares MSCI Emerging Markets ex China Index ETF (KEMX)
Alpha Architect ETF Trust - Freedom 100 Emerging Markets ETF (FRDM)
iShares MSCI Emerging Markets ex China ETF (EMXC)
Columbia EM Core ex-China ETF (XCEM)
We’re inclined to focus on the latter two (EMXC and XCEM), primarily because they’ve been around longer (inception dates of 2017 and 2015, respectively), which offers more context for assessing performance, risk and other factors. With that in mind, let’s take a quick measure of the pair.
Using the oldest year-end common start date (Dec. 31, 2017) indicates similiar performances through today’s close (Nov. 24), with a slight edge for XCEM.
That’s not surprising given that the two funds have similar country allocations, based on the top-10 country holdings, per each ETF’s web site.
The two funds also have similar levels of concentration for the top stock holdings, and even report Taiwan Semiconductor Manufacturing as the leading holding at around 11% of assets, followed by Samsung Electronics (~6%), the second-biggest name in portfolio.
Morningstar shows each fund as a core large-cap with a very slight value bias in terms of the risk factor matrix.
Comparing risk stats also reveals similarities for the usual suspects, based on data from Morningstar.com. Betas are virtually identical, for instance, at 1.15 and 1.17 (EMXC and XCEM, respectively) for the trailing 3-year window, based on MSCI ACWI Ex USA NR USD benchmark. Sharpe ratios are also comparable at 0.63 and 0.60. Ditto for maximum drawdowns: roughly -30%-plus.
Trailing 12-month dividend yield is also roughly equivalent at about 1.4% - 1.5%.
In short, there’s not a lot of conspicuous differences here. So, what’s our first pick? We’re drawn to XCEM’s lower expense ratio — 0.16% vs. 0.25% for EMXC. That’s not a huge difference, although it’s enough to tip the scales, a bit.
Nonetheless, our pick is EMXC, for a couple of reasons. First, it’s a much bigger fund — $1.9 billion in assets vs. around $55 million for XCEM. The heft of resources via the BlackRock-iShares brand is also reassuring re: navigating offshore markets in the EM space. It doesn’t hurt that EMXC’s average trading volume is moderately higher: nearly 380,000 shares a day vs. 248,000 for XCEM, according to Morningstar.
Sure, either fund will get the job done. But if we have to pick, EMXC is our first choice for emerging markets sans China. ■