An end could be in sight for the trade war between the US and China as a phase one deal was implemented on 15 January, pausing any further tariff hikes.
This will release the anchors for the world’s two largest economies and create some momentum as opposed to the tariff hikes which produced hurdles for both parties.
The first phase will result in China purchasing $200bn more of US goods in return for a reduction in tariffs. It also includes an agreement from China to not devalue its currency to entice US financial services groups.
By September 2019, a total of $362bn worth of US tariffs had been implemented on Chinese goods, far greater than China’s tariffs worth $188bn, suggesting China suffered the most from this trade war.
The S&P 500 climbed 30.3% in 2019, in tandem with China’s CSI 300, which grew 36.5%. It is impressive to see this growth despite the trade discussions and tariff hikes which have been ongoing for the best part of two years.
In light of the forthcoming calmness surrounding these trade tensions, there are some ETFs that are likely to benefit significantly.
Emerging market ETFs will be the most positively impacted products from a trade deal after suffering at several points over the last year.
The majority of emerging market ETFs are heavily weighted towards Chinese equities as well as Asian tech and financial firms which are impacted by China’s performance through direct investments and exports. Therefore, these are the exposures that are most likely to gain the most momentum from a concluding trade deal.
The iShares Core MSCI Emerging Markets IMI UCITS ETF (EMIM) is the largest emerging markets ETF available in Europe with $15.7bn in assets under management (AUM). Additionally, it has an expense ratio of 0.18% and has a year-to-date (YTD) performance of 3.6% after only two weeks of trading.
China accounts for 32.5% of EMIM, significantly ahead of Taiwan and South Korea with 12.4% and 12.1%, respectively. In terms of sectors, financials is the largest exposure with 22.2% market value, ahead of information technology with 16% and consumer discretionary with 14.4%.
One of the best performing emerging market ETFs in 2020 so far is the EMQQ Emerging Markets Internet & Ecommerce UCITS ETF (EMQQ). It has produced returns near 8% YTD but comes with a higher fee of 0.86% and a trading premium of 30bps.
It focuses more on technology companies within emerging markets, in particular, video gaming, social networks, online retailers and e-payment systems. EMQQ’s two largest holdings are Tencent and Alibaba, the largest tech companies in China and the world. With only 77 holdings, these two stocks account for 16% of the fund alone.
The Amundi ETF MSCI Emerging markets ETF (AUEG) is also one of the largest products with this exposure. It has $5.8bn in AUM with an expense ratio of 0.2%.
Interestingly, AUEG’s top holdings are not dominated by Chinese stocks. While Tencent and Alibaba are the largest two largest exposure with 4.5% and 4.4%, respectively, the other biggest weighted companies include Taiwanese TSMC (4%), South Korean Samsung (3.7%), South African Naspers (1.2%) and India-based Reliance Industries (1%) and Housing Development Finance (0.9%).
The Vanguard FTSE Emerging Markets UCITS ETF (VFEM) tracks the FTSE Emerging Markets index, differentiating itself from the highly popular MSCI indices which are more commonly used within this exposure.
VFEM has an expense ratio of 0.22%, 4bps greater than EMIM and trades at a discount of 0.01% but suggests it’s highly liquid easily tradeable. It’s reasonably sized as well with $2.5bn AUM, putting it up there with XMMS and AUEG.
A pure play China only ETF could be more suitable for investors that don’t want to incorporate multiple regions into their portfolios or are looking to increase their exposure uniquely for the country.
Franklin Templeton launched a suite of emerging market ETFs in June last year including exposures to Brazil, Korea, India and of course China. The Franklin FTSE China UCITS ETF (FRCH) has a fee of 0.19% which is a cheaper option than most broad EM ETFs.
The range is still relatively new meaning AUM is low at $12m, however since its inception, it has produced returns of 19.6% aided by its YTD performance of 6.7%.
A notable feature for FRCH is that its underlying index implements a 30/18 cap which means the largest constituents’ weight does not exceed 30% and any remaining company weight does not exceed 18%. This limits the concentration of the fund and removes the possibility for Alibaba and Tencent to dominate the exposure.