This is another trying year for emerging markets stocks and exchange traded funds. China is a major reason why. Slack commodities demand from the world's second-largest economy is pinching scores of developing economies, including plenty of the Latin American constituents in the MSCI Emerging Markets Index.
Additionally, Beijing's recent move to devalue the yuan was seen as a blow to emerging Asian economies, including Malaysia, South Korea and Taiwan.
So perhaps an emerging markets ETF that excludes Chinese stocks is an idea whose time has come. The time is now with today's debut of the EGShares EM Core ex-China ETF (NYSE: XCEM). Although the new EGShares EM Core ex-China excludes Chinese stocks, that does not mean the new ETF lacks for diversity.
XCEM tracks the EGAI Emerging Markets ex-China Index, a cap-weighted benchmark that gauges the performance of up to 700 emerging market companies, mostly large- and mid-caps, from 20 developing economies, according to EGShares.
“By choosing a core emerging market exposure that excludes China, investors can decide how much to invest in China as well as the style and vehicle with which they are investing in China,” according to EGShares.
The average market value of the index's 700 constituents is over $27.4 billion, according to issuer data. XCEM has at least one thing in common with traditional emerging markets ETFs, that being a large weight to financial services stocks. Financials are the new ETF's largest sector weight at almost 28.1 percent. However, XCEM does feature a decent-by-comparison technology weight of nearly 13.4 percent. Additionally, the new ETF's exposure to the emerging markets consumer is solid as discretionary and staples stocks combine for over 20 percent of the new fund's weight.
While the new ETF eschews direct holdings of Chinese stocks, the fund is still exposed to China. For example, XCEM's underlying index allocates a combined 34 percent of its weight to South Korea and Taiwan. That is followed by a 13.6 percent weight to Brazil, a country highly dependent on Chinese commodities demand. Three Brazilian stocks, including two commodities producers, are found among XCEM's top 10 holdings.
XCEM is not the first EGShares ETF that uses exclusionary tactics to give investors refined, tactical exposure to emerging markets. For example, the EGShares Beyond BRICs ETF (NYSE: BBRC), which is three years old, excludes the BRIC nations, as its name implies.
XCEM has a net expense ratio of 0.35 percent per year, or $35 per $10,000 invested.
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