2023-08-28 08:00:00 ET
Summary
- The iShares MSCI Emerging Markets ex China ETF invests based on the MSCI Emerging Markets ex China Index.
- The Columbia EM Core ex-China ETF invests based on the Beta Thematic Emerging Markets ex-China Index.
- The article reviews both ETFs and compares the two Ex-China ETFs, including some comparison with a full EM-index ETF.
- I rate both as a Buy under various scenarios and individual's view of how each ETF has performed and why.
Introduction
I decided to return to a topic I have covered thrice before but not recently. For Emerging market investors, has excluding Chinese stock been a good strategy? In late 2019, I penned Putting A Wall Around China With The EMXC ETF as MSCI was about to expand China’s allocation in their EM index to near 40%! The iShares MSCI Emerging Markets ex China ETF ( EMXC ) made sense for either investors wanting no exposure to China or those just wanting less within their EM allocation. When COVID started negatively effecting stock markets around the world, I wrote Avoiding China During Virus Crisis Hurts EMXC , which was a bit of a surprise considering where the epidemic started. Last summer, I updated how a no-China EM strategy was holding up in EMXC: Avoiding China Continues To Work For EM Investors .
That is still the case but as I have written about elsewhere, the index matters and here too that is true and what this article tackles. I will analyze and then compare the EMXC against the Columbia EM Core ex-China ETF ( XCEM ). Between these two ex-China ETFs, XCEM has been the better choice. For investors wanting such an ETF, XCEM is the better performer. Of course, that is history and there is a country allocation that might reverse that choice for some investors.
iShares MSCI Emerging Markets ex China ETF review
Seeking Alpha describes this ETF as:
The iShares MSCI Emerging Markets ex China ETF is managed by BlackRock Fund Advisors. It invests in public equity markets of global emerging region. It seeks to track the performance of the MSCI Emerging Markets ex China Index. The ETF was formed on July 18, 2017.
Source: seekingalpha.com EMXC
EMXC has $4.95b in AUM and comes with 25bps in fees. The TTM Yield is 2.4%.
Index review
MSCI describes their index as:
The MSCI Emerging Markets ex China Index captures large and midcap representation across 23 of the 24 Emerging Markets countries* excluding China. With 666 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
Source: msci.com index
Since 2009, the Ex-China and full EM indices have been the better one about the same number of years, slight edge to the full index.
EMXC holdings review
I start with the country allocations, which I will compare to both XCEM and EEM later.
No surprise in the Top three countries, though the order might be to some. For those who look to India to be the new supply chain pillar, this ETF has an advantage over the other two ETFs. As for all ETFs holding Russian stocks, they cannot be sold and are on the books at zero value. Two sectors account for more than 50% of the portfolio, Technology and Financials, mostly being large banks.
Top holdings
EMXC holds over 700 stocks, yet the Top 20 still accounts for just over 30% of the weight. Like with the S&P 500, the top technology stocks here each have a significant weight in the portfolio. At only 14%, the bottom half of the portfolio has a dampen effect of the returns investors will see.
EMXC distributions review
EMXC pays semi-annually unlike the other ETF which only does a year-end payout. EMXC earns a "C+" grade from Seeking Alpha for their payout results.
Columbia EM Core ex-China ETF review
Seeking Alpha describes this ETF as:
The Columbia EM Core ex-China ETF is managed by Columbia Management Investment Advisers, LLC. It invests in public equity markets of global emerging region. The fund seeks to track the performance of the Beta Thematic Emerging Markets ex-China Index . The ETF started on September 2, 2015.
Source: seekingalpha.com XCEM
XCEM is much smaller at $335m in AUM. Fees come to 16bps, less than what EMXC charges. The TTM Yield is 2.2%.
Index review
This index comes with this description and features.
The Beta Thematic Emerging Markets ex-China Index is a market capitalization-weighted index designed to provide broad, core emerging markets equity exposure by measuring the stock performance of up to 700 emerging markets companies, excluding companies listed or domiciled in China or Hong Kong. Positions are market cap weighted, with no restrictions on sector, country or position size limits. The index is reconstituted annually; securities are rebalanced quarterly. The Index is also sponsored by Columbia Management Investment Advisers.
Source: columbiathreadneedleus.com index
The Index has done very well compared to the full MSCI EM index over the past five years.
XCEM holdings review
Unlike what sectors will show, there is a major difference at the top when it comes to country allocations, with India dropping from 1st to 3rd.
Here, the sectors align as such. Detail data was not available to get country or sector counts.
The sector ranking does not changed compared to EMXC until the fifth largest sector in each.
Top holdings
With just over 300 holdings, here the Top 20 account for almost 40% of the portfolio; again dominated by the same two stocks.
Despite the smaller number of holdings, the bottom half here has about the same weight as those in EMXC at 13%.
XCEM distributions review
The ETF has shown almost no growth in their payouts over the past five years. Seeking Alpha only give the ETF a "C+" grade for this factor.
Comparing ETFs
For some parts of this comparison, I will include data for the iShares MSCI Emerging Markets ETF ( EEM ) as avoiding China is only logical if those ETFs provide better results than EEM does. As a note: China is about 30% of the EEM ETF. First comparison is for market-cap and style allocations.
Neither variable differs much between the two ex-China ETFs. Both have a higher allocation to stocks classified as Blend than does the EEM ETF. While both XCEM and EEM have similar WAMCs ($37b), EMXC value is only $32b. PE and PB values match across all three.
When we examine the country allocations between the two ex-China ETFs, there are several large differences.
XCEM has higher allocations of over 2% versus EMXC in Taiwan, Saudi Arabia, and the UAE, though the biggest difference is EMXC which has over 10% more weight in India than XCEM does; something that definitely could explain the performance diversion between the two ETFs. The different allocations between sectors are less noticeable.
Here we see XCEM holding a slight overweight in Financials and Industrials and underweight in Consumer Discretionary stocks. Compared to EEM, both hold higher allocations to Financials, Information Technology, Materials, and Industrials, offset by lower allocations to Consumer Discretionary and Communication stocks. At the stock level, no weight for any stock held in both ETFs is greater than 2.3%; only nine differ by over 1%.
Investing results
Since both ex-China ETFs have existed, the XCEM one has better results. I mentioned the country weighting for India favors EMXC. With India performing better than the overall EM indices, I would have expected this to drive EMXC to the top. Since it didn't, other factors came into play which are hard to pin down looking at static data.
Portfolio strategy
There seems to be three possible strategies. First, China is the second biggest economy and now populous country, staying invested makes sense. Second, those who agree investing in China is logical but not at the percentage EM index-based ETFs have. I see at least two options for those investors. Hold an ex-China EM ETF plus EEM in a mix they like or combining EEM with a China-only ETF in a mix they like. There are several varieties to pick from.
The third option is to abandon China completely and use EMXC or XCEM for their EM exposure. The following present why that could be a profitable strategy based on concerns that the worldview and China itself have changed. The Wall Street Journal ran two articles on that topic recently.
Quotes from the first article include:
Long-term projections suggest that China’s population, which now stands at about 1.4 billion, will drop below one billion by 2080 and 800 million by 2100. China’s working-age population, which peaked in 2011, is projected to decline nearly a quarter by 2050. Meanwhile, the number of elderly Chinese will rise from 200 million to 500 million at midcentury, and providing for their needs will be a mounting challenge for China’s workers and policy makers.
Burdened by rising debt, local governments are finding it difficult to sustain their current pace of infrastructure investment. Meanwhile, China’s housing sector looks desperate. Dozens of developers have defaulted on bonds and other financial obligations in the past two years.
The monthly value of new home sales by China’s 100 largest property developers has fallen more than 80% since late 2020. Looking forward, annual housing demand is estimated at between nine million and 10 million units, well below the peak (much of it speculative) of 14 million purchases in 2021.
China’s export-driven growth model is also in trouble. Over the past year, the country’s exports dropped 14.5%. Its exports to the U.S. accounted for just 13.3% of U.S. imports during the first half of 2023, the lowest share in 20 years, and its exports to the European Union sagged as well. The intensifying struggle between the two superpowers has led companies in the U.S. and elsewhere in the West to reconfigure their supply chains, a process that they aren’t likely to reverse without a fundamental improvement in U.S.-China relations.
Source: www.wsj.com/articles
The second article had several charts, this set being the most telling.
As with Japan, Western Europe, and the United States, population trends are or will soon cause labor shortages. While the USA can alleviate some of the concerns by fixing its immigration policies, I do not see that as a viable option for China. A dropping ROA should translate into less foreign investment, as would any supply-chain shifts away from China to India or Southeast Asia, where the populations are younger and still growing.
Predictions by economic experts have been wrong before about the rise and fall of various countries. There are those who say the "American Century" is coming to a close. Only time will tell.
Final thoughts
I am rating both as a Buy. Which is the better is summed up in the next two sentences. While XCEM has done better since EMXC started, here the allocation to India is much higher. Going forward, those who believe in India would rather own this ex-China ETF. Despite underweighting India compared to EMXC, XCEM has achieved better results. Going forward, those believing other factors besides India will drive returns would stay with this ex-China ETF.
Investing professionals like to say some funds are SWANs, "Sleep Well At Night". As others use the term, I apply it to my whole investment portfolio, not individual holdings. One should judge how much exposure to a particular country in the same context.
For further details see:
EMXC Vs. XCEM: Even When Excluding China, The Index Matters