U.S. Markets open in 7 hrs 3 mins

Playing Emerging Markets? Try the New Ex-China ETF

Zacks Equity Research

Emerging markets have long been investors’ favorites due to their high growth potential. Agreed, this corner of the investing spectrum underperforms whenever the subject of Fed policy tightening comes up and might falter when the Fed actually carries out the lift-off sometime in 2015. But investors should note that the emerging marker bloc seems better insulated this time around and should not subject to the same massacre it endured during the taper tantrum in 2013 (read: ETFs to Move on Mixed U.S. Job Data).

However, this year a new headache – occasional and massive Chinese stock market crash – is upsetting the emerging market bloc. Like several other emerging markets, Chinese growth momentum decelerated too, but its stocks soared earlier this year on hopes of a fat stimulus measure. Stupendous gains without any solid economic footing led the Chinese equities to fall in the trap of a steep correction from June, with August being the ugliest month (read: August ETF Asset Flow Roundup: Treasury Gains, EM Lags).

The Chinese stocks lost over $5 trillion in the recent rout. In fact, this upheaval hardly spared any risky asset across the globe. In such a situation, it makes sense for edgy investors to look for emerging market ETFs without the Chinese flavor. For them, EGShares recently rolled out an ex-China Emerging Market ETF (XCEM). Let’s delve a little deeper:

XCEM in Focus


The fund seeks to offer exposure to the large and mid-cap companies from about 20 emerging market companies but staves off China by tracking the EGAI Emerging Markets ex-China Index. Considering country-wise allocation, South Korea takes the top spot having 18.27% allocation, followed by Taiwan and Brazil having 15.76% and 13.62% allocation, respectively. India and South Africa also get a sizable share close to 10% each.


This focus results in the index holding a basket of around 700 companies. Samsung (4.40%), Taiwan Semiconductor (3.36%) and Itau Unibanco Holding (2.14%) are the top three holdings of the fund.


As far as sector allocation is concerned, the fund is quite heavily weighted toward Financials with about 30% focus. Information technology (13.4%) and Industrials (13%) round out the top three positions. The fund charges 35 bps in fees (see all Broad Emerging Market ETFs here).

How Might it Fit in a Portfolio?

The fund is an interesting option for investors looking to invest in the emerging markets. The growth rates in the emerging markets have cooled off in recent years, but are still a lot better than several developed nations. To add to this, stimulus announcements in some nations and pro-growth political reforms in others might entice some investors.

Moreover, foreign investors park their money in the riskier emerging market bloc for higher yields. Real cost of borrowing in Brazil (which the fund’s third holding) is the highest among the world's leading emerging markets. So, investors who want to ride such benefits but seek shelter from the recent volatility in the Chinese market may find this an intriguing option (read: Inside The Crash in China ETFs).

ETF Competition

Though the emerging market space is chock-a-block, EGShares has come up with a new theme. China has widespread exposure in most emerging market ETFs. So, the product should get its due share of success.

The space is primarily dominated by two large players – Vanguard FTSE Emerging Markets ETF (VWO) and iShares MSCI Emerging Markets ETF (EEM) – managing an asset base of $36.4 billion and $20.8 billion, respectively, but with a notable focus on China. VWO charges 15 bps while EEM is a costlier option with 67 bps in fees.

Both funds yield around 3.25% and 2.57%, respectively. While XCEM does a good job on the expense ratio front, it should also deliver on the yield front to have a clear road ahead. Notably, some of the high-dividend emerging market ETFs are SPDR S&P Emerging Markets Dividend ETF (EDIV) and Emerging Markets Equity Income Fund (DEM), yielding about 6% each annually.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
EGS-EM CR XCHNA (XCEM): ETF Research Reports
VANGD-FTSE EM (VWO): ETF Research Reports
ISHARS-EMG MKT (EEM): ETF Research Reports
WISTR-EM HI (DEM): ETF Research Reports
SPDR-SP EM DVD (EDIV): ETF Research Reports
To read this article on Zacks.com click here.
Zacks Investment Research
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report