Market Overview

A New Emerging Markets ETF With A Surprise Exclusion

A New Emerging Markets ETF With A Surprise Exclusion

It's not unusual for an emerging markets exchange traded fund to use exclusionary tactics. What is unusual is when an emerging market ETF offering access to multiple developing economies excludes China, the world's second-largest economy.

What Happened

KraneShares, the ETF issuer known primarily for its expertise with Chinese assets, introduced the KraneShares MSCI Emerging Markets ex China Index ETF (NYSE: KEMX) last Friday. The new ETF, the 13th fund in the KraneShares stable, tracks the MSCI Emerging Markets ex China Index.

That index provides exposure to large- and mid-cap stocks in developing economies excluding China.

Why It's Important

The widely followed MSCI Emerging Markets Index allocates almost 33 percent of its weight to China, more than double its second-largest country exposure, which is South Korea. That benchmark's China weight is expected to increase as MSCI increases the weight its indexes have to A-shares, the stocks trading on mainland China.

In other words, investors buying supposedly diversified emerging markets ETFs are often making larger China bets than they initially realize.

“The Emerging Markets ex China Index captures large and mid cap representation across 23 of the 24 Emerging Markets (EM)countries excluding China,” according to MSCI. “With 667 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.”

As of the end of the first quarter, that index allocated over 36 percent of its combined weight to South Korea and Taiwan and over 24 percent of its combined weight to India and Brazil.

KEMX's underlying index devotes 25.22 percent of its weight to financial services stocks, a slight overweight to that sector relative to the MSCI Emerging Markets Index. KEMX's index also has a 20.28 percent weight to technology stocks, well above the 14.59 percent allocated to that sector in the MSCI Emerging Markets Index.

What's Next

“Investors will be able to pair KEMX with other KraneShares China-focused core and thematic funds to make a strategic investment without duplicating exposure to China,” according to KraneShares.

The new ETF charges 0.49 percent per year, or $49 on a $10,000 investment.

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