BlackRock’s iShares divison, a leading provider of exchange traded funds (ETFs) has filed with the SEC for the launch of a new fund: the iShares MSCI Emerging Markets ex-China ETF.
The ETF seeks to track the performance of large and mid-cap companies in emerging markets while excluding Chinese equities in the process. It will track the MSCI Emerging Markets ex-China Index which covers 682 constituents in 22 countries: Brazil, Chile, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Russia, Qatar, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.
The index was launched on the 9th March 2017, therefore past performances have been back-tested in order to analyse how it would have performed over a certain time period. In terms of performance, the index would have achieved higher returns than the MSCI Emerging Markets Index in 2016 (15.02% vs 11.19%).
Like other ETFs on the market, a “passive” approach will be taken and the new fund will invest in at least 90% of the assets found in the underlying index.
South Korea, Taiwan, India and Brazil hold the largest weightings in the index, with all four of these countries boasting over 10% individually (20.17%, 16.89%, 11.57% and 11.22% respectively). The prospectus also outlines the risks of investing in the countries found in the index, for example:
- South Korea – Aside from legal, political and currency risks, the potential hostilities from neighbouring North Korea could have a negative effect on South Korea’s economy.
- India – Securities markets in India are relatively underdeveloped compared to other markets, leading to a decrease in liquidity and increase in uncertainty and transaction costs.
- Russia – Economic sanctions against Russia after the situation with Ukraine are to be considered and have the potential of creating a negative impact on markets in the long-run.
- Mexico – President Trump’s push to “renegotiate” the North American Free Trade Agreement (NAFTA) could have an adverse effect on imports and exports from and to Mexico. The political implication will have a profound effect on Mexican securities in the fund.
In terms of sectors, the Financial, IT and Consumer Discretionary industries command over 50% of the index in total and the first two sectors make up 80% of the Top 10 holdings. Utilities, Health Care and Real Estate have the smallest allocations. The largest company, Samsung Electronics, also has the largest weighting which stands at 5.39% of the index.
Risks associated with investing in these sectors include (but are not limited to): the regulatory environment prevalent in each country; sensitivity of demand and supply within these industries; and raw material and commodity prices vital to production in certain sectors.
Details of fees and expenses (management, operating and fund) were not quantified in the filing. Information on the ticker and exchange were also not provided.
Frontier Markets Involved
The three Frontier Markets included in the index are Egypt, Qatar and UAE. Despite MSCI classifying these markets as Emerging Markets, many other index providers do not and these three markets tend to have lower weightings in the MSCI Emerging Markets Index.
Although MSCI have yet to provide a full breakdown of companies in the index, the likely candidates that will be included for these countries are: Commercial International Bank (Egypt), Qatar National Bank (Qatar) and Emirates Telecom (UAE).
The filling also highlighted the potential risks of investing in these countries. Reliance on oil, barriers for foreign investors, currency issues and terrorism were cited as potential problems. Limits on the magnitude of investment from non-domestic investors was also mentioned.
However, if allocations in the countries are low (relative to others in the fund), then these problems will not have a large proportionate effect on the overall performance. Nations in the Middle East are pushing to diversify away from oil and Egypt in particular has benefited from a boost in foreign inflows into its property market after floating the Egyptian Pound.
Who is this ETF for?
Similar to other ETFs that exclude specific countries, the iShares MSCI Emerging Markets ex-China ETF will probably be suitable to those who wish to have complete control of their exposure to China (which could be achieved via investing in funds and other ETFs), but it will also appeal to those who hold bearish sentiments towards Chinese markets while having some degree of optimism for other markets in the Emerging Market space.
This won’t be the first Emerging Markets ETF that excludes China on the market. EGShares launched an ex-china ETF in 2015 and it is currently enjoying an 11% rise since the start of 2017. South Korean and Taiwanese securities also heavily feature in this ETF.
At this present time, China’s markets have been on the rise and the Shanghai Stock Exchange Composite Index has posted a year-to-date gain of 4.74%. The likes of Morgan Stanley, Goldman Sachs and Citigroup are upbeat about about the Asian economy, with the latter patiently waiting for the nation’s $9 trillion bond market to open up to foreign investors.