The on-again-off-again trade war between the U.S. and China is enough to keep investors guessing. Some investors are using ETFs to simply avoid all the drama.
ETF giant Vanguard this month launched an emerging markets fund that erases exposure to China. Vanguard Emerging Markets ex-China ETF is the latest ETF that owns a basket of companies from emerging nations except China.
Such ETFs had proved popular with investors during an economic slowdown in China plus a consistent threat of tariffs from U.S. President Donald Trump. Competing ETFs, such as iShares MSCI Emerging Markets ex China and Columbia EM Core ex-China, have seen interest ebb and flow along with the health of the relationship between the trading partners.
"In 2024, there was significant demand for these ETFs," said Todd Rosenbluth, director of research with TMX Vetta Fi. Last year, for instance, investors poured $6.7 billion into iShares MSCI Emerging Markets ex China ETF. But this year, $5.4 billion flowed out.
"Similarly, the smaller Columbia EM Core Ex-China ETF had nearly $500 million in net inflows in 2024 but has seen over $100 million in net outflows this year," Rosenbluth said.
How To Remove (Or Reduce) China In Your Portfolio
It's important to understand just how invested you are to China even if you own a diversified emerging markets ETF. And that's why reducing exposure might make sense.
The standard iShares Core MSCI Emerging Markets ETF puts 27% of its portfolio in China stocks. That level can be cut by owning iShares MSCI Emerging Markets ex China ETF.
"Some investors seek to avoid exposure to China due to geopolitical concerns. Others use ex-China funds to reduce, rather than completely eliminate, their exposure," Rosenbluth said. "Investors have paired IEMG with EMXC to achieve a more moderate China exposure."
Similarly, investors who own Vanguard's broad emerging markets ETF, Vanguard FTSE Emerging Markets might add VEXC to lower China exposure. But Vanguard's China-less ETF might have broader appeal, too, due to its low fees. It only charges 0.07%, which is less than half the 0.25% charged by iShares MSCI Emerging Markets ex China ETF.
It's Mostly About Exposure
Interestingly, cutting China exposure this year has hurt performance more than it's helped. The iShares MSCI Emerging Markets ex China ETF is up 25.8% this year. That lags the 27.5% gain by iShares Core MSCI Emerging Markets ETF.
And that underperformance from skipping Chinese stocks is mostly consistent. Other ex-China ETFs, such as Avantis Emerging Markets ex-China Equity, Global X Emerging Markets ex-China and Putnam Emerging Markets ex-China, all lag the broader emerging markets ETFs this year. And that's even as they "adopt an active, fundamental approach to selecting non-Chinese stocks," Rosenbluth said.
There's one exception, though. The Freedom 100 Emerging Markets ETF is up 37.4% this year despite leaving out China. The ETF "stands out as it specifically excludes Chinese stocks based on its focus on countries with strong political and economic freedom. China does not meet these stringent criteria."
And it only puts 2% of its portfolio in India, unlike most emerging market ETFs that own much more. Instead, Chile and Poland each represent more than 10% of Freedom 100 Emerging Markets. And that's paying off well, as Poland's market rallies this year thanks to a tech boom there.
So, who needs China after all?
Emerging Markets ETFs With No China
| ETF | Symbol | YTD % ch. | Fee | Assets |
|---|---|---|---|---|
| Vanguard Emerging Markets Ex-China | VEXC | N/A | 0.07% | N/A |
| Columbia EM Core ex-China | XCEM | 26.6% | 0.16% | 1.3 |
| iShares MSCI Emerging Markets ex China | EMXC | 25.8% | 0.25% | $12.70 |
| Avantis Emerging Markets ex-China Equity | AVXC | 23.3% | 0.33% | 0.2 |
| Freedom 100 Emerging Markets | FRDM | 40.2% | 0.49% | 1.5 |
| Putnam Emerging Markets ex-China | PEMX | 26.8% | 0.69% | 0.02 |
| Global X Emerging Markets ex-China | EMM | 21.1% | 0.76% | 0.03 |
