U.S. Markets closed

Reducing China Exposure in Emerging Markets ETFs

This article was originally published on ETFTrends.com.

Emerging markets stocks and the corresponding exchange traded funds are struggling this year and China is a big reason why. Amid trade war speculation, Chinese stocks are floundering, pressuring an array of cap-weighted emerging markets ETFs that feature significant weights to the world's second-largest economy.

Investors looking to stick with emerging markets fund while reducing China exposure relative to cap-weighted benchmarks can consider ETFs such as the Schwab Fundamental Emerging Markets Large Company ETF (FNDE) .

FNDE tracks the Russell Fundamental Emerging Markets large Company Index, which selects, ranks and weights components based on fundamental factors like adjusted sales, retained operating cash flow and dividends plus buybacks.

Today, FNDE allocates just over 20% of its weight to China, significantly lower than its aforementioned rivals. However, FNDE “employs no direct limit on country weightings, so geographic diversification could still be an issue in the future. Also, it weights holdings by fundamental measures rather than market cap, making it a value-oriented strategy,” according to Morningstar.

FNDE is positioned as a value fund.

“You are taking on other forms of risk within that fund. You have a higher exposure to commodities-based companies, primarily oil and energy companies, and then a little more in the materials sector as well. While it's good that you are dialing back on China, you are taking on some other risks there as well,” according to Morningstar.

How to Reduce Exposure to Chinese Stocks

T he iShares MSCI Emerging Markets Minimum Volatility ETF (Cboe:EEMV) is another solid option for reducing exposure to Chinese stocks.

EEMV is a low-vol variant on the widely observed MSCI Emerging Market Index, is a solid option for investors looking for a volatility-reducing strategy that provides exposure to resurgent developing world stocks. The $4.49 billion EEMV has a 27% weight to China compared to 32% in the MSCI Emerging Markets Index.

Related: Are China ETFs Oversold?

EEMV is “looking for less sensitive companies. you are a little overweight in the consumer staples and the utilities sectors as you would expect. That fund at the end of the day washes out, you are about 25% in China with that fund. A little bit better compared to like a cap-weighted index. But the bigger thing is, is you are taking on a lot less market risk with that as well. We've got that at Silver for that reason. The expense ratio is also pretty good at 25 basis points,” notes Morningstar.

For more on smart beta ETFs, visit our Smart Beta Channel.