Introduction
Asset management firm Vanguard Group is set to introduce a new exchange-traded fund (ETF) focused on emerging markets, deliberately excluding China. This move reflects a growing trend among investors concerned about the implications of China's position in global financial portfolios.Context
The Vanguard Emerging Markets ex-China ETF is anticipated to launch later this summer. Investor unease over China's tumultuous trade relations with the United States has created a desire to isolate their investments in Chinese stocks, despite significant recoveries in this sector. With the introduction of this ETF, the total number of emerging market ETFs omitting Chinese stocks will rise to 13, as per data from Morningstar; notably, two-thirds of these have been unveiled since 2023, a year marked by the CSI300 index's continuous losses.Developments
Bryan Armour, an ETF strategist at Morningstar, remarked on the growing demand for ex-China funds. He observed that investors are increasingly wary of geopolitical risks and state intervention affecting their investments in China. However, recent trends indicate that inflows into traditional emerging market funds are surpassing those into their ex-China counterparts.Sammy Suzuki, head of emerging markets equities at AllianceBernstein, believes that enthusiasm for ex-China ETFs may be waning, given the resurgence of Chinese stocks. In the past year, the iShares China Large-Cap ETF has witnessed a remarkable gain of 35.34%, which has positively influenced the 9.7% increase of the broader iShares MSCI Emerging Markets ETF. In contrast, the iShares MSCI Emerging Markets ex-China ETF has only increased by 4.8%.
Jason Hsu, chief investment officer at Rayliant Global Advisors, noted the complexity of China's market. He stated that both dedicated China ETFs and ex-China emerging market products will coexist due to China's significant influence on the market.
Vanguard, managing $10.1 trillion in assets, filed for the new ETF with the U.S. Securities and Exchange Commission last Friday. Currently, the firm offers the Vanguard FTSE Emerging Markets ETF, valued at approximately $85.9 billion, which allocates around 30% of its assets to Chinese equities. Jeff DeMaso, editor of the Independent Vanguard Adviser, indicated that investors opting for the new ETF will shift from a substantial investment in China to a significant position in Taiwanese and Indian firms, which make up nearly 60% of the underlying index.
Vanguard's spokesperson emphasized that the new ETF will provide investors with an alternative for avoiding Chinese stocks, boasting a competitive fee of only 0.07%, in comparison to the 0.25% charged by BlackRock's similar offering.