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Market Overview

ETFs Not Getting Any Help From China

ETFs Not Getting Any Help From China

The iShares Core MSCI Emerging Markets ETF (iShares Inc. (NYSE: IEMG)) is up 17.6 percent year-to-date, good for one of the better showings among diversified emerging markets exchange-traded funds.

IEMG and rival diversified emerging markets ETFs are heading toward their best annual performances in several years, thanks to a variety of catalysts. Perhaps surprisingly, broad emerging markets ETFs are grinding higher this year with little help from China, the largest developing economy and often a significant country allocation in ETFs such as IEMG.

Emerging Markets ETFs

“The country exposure of the MSCI emerging markets index has shifted over time. Six years ago, China and Brazil represented 18 percent and 16 percent of assets, respectively, but today the weightings are 27 percent and 8 percent of assets. However, iShares MSCI Brazil Index (ETF) (NYSE: EWZ) has climbed 84 percent year to date, recovering from three straight calendar year losses. In contrast, iShares MSCI China Index Fund (NYSE: MCHI) gained just 9.2 percent in 2016,” said CFRA Research in a note out Monday.

Related Link: Getting Reacquainted With An Old Europe ETF Friend

IEMG debuted four years ago as cost-efficient alternative to higher-fee funds tracking the widely followed MSCI Emerging Markets Index. The ETF devotes over a quarter of its weight to China, making the world's second-largest economy IEMG's largest country weight. On the other hand, IEMG's Brazil weight is just 7.6 percent, making Latin America's largest economy the ETF's fifth-largest geographic allocation.

IEMG is a member of the iShares core suite of ETFs, which recently saw broad-based fee reductions. The emerging markets ETF now charges just 0.14 percent per year, or $14 on a $10,000 investment. That is one of the lowest annual fees among all emerging markets ETFs.

Year-to-date, investors have allocated $6.14 billion in new assets to IEMG, good for the second-best total among emerging markets ETFs. Only six ETFs have seen larger inflows than IEMG this year.

Country Exposures, Sector Weights

Just as the country exposures have changed in emerging markets ETFs over the years, so have sector weights. Yes, financials are still the largest sector weight in ETFs such as IEMG. However, technology has taken on great importance in these funds. For example, IEMG has a technology weight of 21.7 percent, second only to financial services.

“While investor perception of the macroeconomic prospects of these countries is distinct, the impact of currencies also contributes to the relative performance. According to Raman Subramanian, head of equity applied research for MSCI, the Chinese yuan fell relative to emerging market currencies, while the Brazilian real has appreciated,” added CFRA.

The research firm has a Market Weight ratings on three of the major China ETFs, including MCHI.

Full ratings data available on Benzinga Pro.

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