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Seeking a China-Free EM Exposure? Play This ETF

Emerging market (EM) ETFs have had a great run this year (as of July 21, 2017) with iShares MSCI Emerging Markets EEM (EEM) returning over 24%. The segment is doing well on improving global economic fundamentals and accommodative developed market central banks that are still keeping interest rates low and driving investors toward the relatively high-yielding EM bloc.

The fund in fact gained over 22% in the last one year and 16% in the last two years. Now investors should note that EEM has about 28% exposure, the highest, to China. With iShares China Large-Cap ETF FXI losing about 0.6% in the last two years, investors can imagine how adverse the impact of China on the two-year returns of EEM was (read: Top Emerging Market ETFs of First Half 2017).

Though the Chinese economy has improved lately, it is still guilty of a slowdown. The year 2016 underscored China's slowest growth clip in 26 years. Probably, this is why, iShares recently launched an ETF, namely iShares MSCI Emerging Markets ex China ETF EMXC). Let’s delve little deeper.

Inside EMXC

The fund was launched on July 18, 2017. The fund selects stocks from emerging markets barring China. The fund has a basket of 429 securities with the top holding iShares MSCI INDIA ETF (INDA) holding over 12%, while other securities do not hold more than 6.33% weight individually. The fund has a moderate expense ratio of 0.49%.

How Does it Fit in a Portfolio?

For investors believing in the emerging market rebound and looking to have a China-free exposure, this fund can be a good choice. This is because of a string of issues related to the Chinese economy (read: 2017 Brings Luck for China ETFs: Will the Rally Last?).

Factory output has long been a cause of concern for the Chinese economy. Bank lending ballooned despite repetitive caution relating to the country's ominously high corporate debt level. Economists flagged caution as high leverage and inflated property valuation may put a check on its growth.

On the other hand, emerging markets as a whole are reaping benefits of a subdued greenback, commodity market strength and policy easing in several EM economies. So, a desire for a safer China-free exposure makes sense.

ETF Competition

The emerging market space is crowded with products, but most of them have an exposure to the biggest EM economy – China. So, from that context, the fund has almost no competition. Only a few emerging market ETFs that have limited exposure to China can give competition to this newbie.

Some of these funds are Guggenheim MSCI Emerging Markets Equal Country Weight ETF EWEM, Hartford Multifactor Emerging Markets ETF ROAM, SuperDividend Emerging Markets ETF SDEM, Franklin LibertyQ Emerging Markets ETF FLQE) and WisdomTree Emerging Markets Quality Dividend Growth Fund DGRE. The maximum weight that China has in these funds is 12.4% (see all Broad Emerging Market ETFs here).

Having said this, we believe that chances of EMXC’s outperformance is pretty high given its decent expense ratio and a unique investment objective.

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ISHARS-EMG MKT (EEM): ETF Research Reports
ISHARS-CHINA LC (FXI): ETF Research Reports
GLBL-X SPRDV EM (SDEM): ETF Research Reports
WISTR-EM QD (DGRE): ETF Research Reports
GUGG-M EM MK E (EWEM): ETF Research Reports
HARTFRD EMG MKT (ROAM): ETF Research Reports
ISHARS-MS EM XC (EMXC): ETF Research Reports
FL-EMRG MARKETS (FLQE): ETF Research Reports
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