The elephant in the emerging markets (EM) room is China, and not just because it’s the world’s second-largest economy behind only the U.S. By virtue of that heft, China is also, typically, the biggest geographic exposure in traditional diversified EM exchange traded funds.
Obviously, that’s good when China stocks are performing well and not so great when those stocks are lagging, as is the case today. Hence, the elephant in the room. However, investors can mute China risk in their portfolios via ETFs such as the KraneShares MSCI Emerging Markets ex China Index ETF (KEMX). The fund, which recently turned five years old, follows the MSCI Emerging Markets ex China Index.
As is the case with any other asset, there are potential risks and rewards with KEMX. The risk is that the ETF won’t directly participate in a China equity market rebound when that scenario materializes. The reward is that when Chinese stocks lag, KEMX won’t feel severe punishment. In fact, the KraneShares fund is higher by 12.72% over the past year -- a period in which the MSCI Emerging Markets Index gained just 6.23%.
What Makes KEMX Click
A standard recipe employed by ex-China ETFs is to increase weights to India, South Korea, and Taiwan. KEMX follows suit, as those three countries combine for nearly two-thirds of the ETF’s geographic exposure compared to about 43% for the category average.
KEMX’s large weight to India has benefited investors, because while China stocks have struggled over the past several years, India equities have been among the best performers in the world -- a trend that’s continuing this year. Likewise, KEMX’s elevated exposure to Taiwan tethers investors to a high-quality, tech-rich economy.
“Emerging-markets ex China funds tend to have more exposure to Brazil and Mexico, which have their own economic, social, and political downsides. Both countries have been accused of having corrupt governments, which have led to political uprisings,” noted Morningstar’s David Carey.
