In a year of significant innovation across many asset classes for the European ETF industry, there is one product launch that stands out in particular for its simplicity, offering investors another way of slicing and dicing the emerging markets arena.
The Lyxor MSCI Emerging Markets ex China UCITS ETF (EMXC) was not launched to much great fan fare in July however is the first-of-its-kind ETF in Europe to enable investors to access emerging markets without Chinese stocks in the portfolio.
Removing China radically alters the weightings in the index. China accounts for approximately 34% of the MSCI Emerging Markets index with this figure set to increase as more A-Shares are added.
With China entirely removed, South Korea, Taiwan and India are EMXC’s three biggest weightings, accounting for around 46% of the index while the remaining 22 countries the ETF offers investors access to make-up the remaining 54%.
The thinking behind launching an emerging markets ETF without Chinese stocks is as follows. China is one of the most rapidly developing countries in the world and remains only behind the US in terms of GDP size.
With Asia’s largest economy increasingly opening its doors to foreign investors, it makes sense for investors to access the country through single-country ETFs.
Not only, as Lyxor says, does this enable more precision in portfolio weighting, but also allows investors to choose whether they want A-Shares or H-Shares in their portfolio.
Being able to have that precision at a time when the threat of escalating trade tensions between the US and China lurks in the background is an important tool in the armoury for investors.
The timing of the launch is also significant as it is amid the major index providers’ decision to incorporate A-Shares into their emerging market benchmarks.
While this is an important step for China, it leaves investors, who own broad emerging markets ETFs, with little choice about the amount of A-Shares exposure they get in their products. EMXC changes this.
Further China A-Shares inclusion prompts concentration risk fears
There are many ways investors can gain access to China so their exposure should not be jumbled into their wider emerging markets bucket but should have a specific weighting like the US or the UK. By removing China from the wider emerging markets segment, EMXC allows investors to focus in on this.
The ETF has already captured the imagination of investors gathering $86m since launching on 10 July.