Investor interest in ETFs that cover emerging markets excluding China has led to the launch of a dozen new products in recent years. These funds that omit Chinese stocks generally outperformed the broader emerging-market ETFs during the height of the U.S-China trade tensions in past years.
But this year is different. Performance of ex-China ETFs is lagging. So what does the future hold for those funds?
"The interesting thing is that the emerging-markets ex-China ETFs are actually falling out of favor with investors this year and they're underperforming broader emerging markets," said Todd Rosenbluth, head of research at TMX VettaFi. "In 2023 and in 2024, they were popular and they performed relatively well as China was underperforming. "
Best ETFs Snubbing China
Due to their recent underperformance, investors have been shifting away from these funds. For example, the largest ex-China fund, the $14-billion-in-assets iShares MSCI Emerging Markets ex China ETF, saw $2 billion of net outflows since May 1 and $2.9 billion this year. The fund is up roughly 12% this year so far.
Compare this with the $92 billion iShares Core MSCI Emerging Markets ETF, with a 28% exposure to China, which gained $2.9 billion in investor net flows year to date. The fund rose 14% this year.
Another fund in the space is $1.2 billion Columbia EM Core ex-China. It had $80 million of net outflows this year and is up 12% year to date. While the returns are still good, "excluding China has not been rewarding this year," said Rosenbluth.
But the funds have multiple use cases, he added. They can serve as a tool to fine-tune exposure to China by combining them with a broader fund, such as the $116 billion Vanguard FTSE Emerging Markets ETF. This fund holds 32% in Chinese stocks and is up 12% this year.
Looking At The Long Term
While ex-China funds may be trailing broader emerging markets in the short term, their long-term outlook remains strong, according to Aniket Ullal, head of ETF research and analytics at CFRA Research.
"In the short term, China will probably do better than ex-China, because right now the U.S. and China are just about to reach a trade deal, so that should benefit China," he said. "But in the longer term, I think local politics in the U.S. may favor ex-China policies."
A case in point: Vanguard recently announced plans for a low-cost emerging-market ETF that excludes China, according to Reuters. The move follows a request from the State of Missouri for products that exclude Chinese stocks. The state's pension fund already divested Chinese stocks at the end of 2023. Missouri is now seeking an ex-China option for its $4.5 billion 529 college savings plan.
This also comes as several big tech companies begin shifting parts of their supply chains to other countries. "Companies have become more aware of their dependence on China, and so in the long run I think companies may look to diversify to Mexico, India or Vietnam," he said.
That said, China remains an important component of a portfolio.
"Earlier, investors used to buy just a standard emerging-market fund," said Ullal. "The problem with that is that China has a very big proportion in those funds' exposure. If investors buy China exposure and ex-China exposure separately through two separate ETFs, then it's easier for them to calibrate their exposure to China, which is harder to do if you just buy a standard emerging-markets fund."
Largest Emerging-Market ETFs
Listed by assets
| ETF | Symbol | Assets in billions | Fee |
|---|---|---|---|
| iShares Core MSCI Emerging Markets | IEMG | $90.8 | 0.09% |
| Vanguard FTSE Emerging Markets | VWO | 88.0 | 0.07% |
| iShares MSCI Emerging Markets | EEM | 17.8 | 0.72% |
| iShares MSCI Emerging Markets ex China | EMXC | 13.9 | 0.25% |
| SPDR Portfolio Emerging Markets | SPEM | 12.0 | 0.07% |
| Avantis Emerging Markets Equity | AVEM | 10.2 | 0.33% |
| Schwab Emerging Markets Equity | SCHE | 10.0 | 0.11% |
| Schwab Fundamental Emerging Markets Equity | FNDE | 6.8 | 0.39% |
| Dimensional Emerging Markets Core Equity 2 | DFEM | 5.3 | 0.39% |
| iShares ESG Aware MSCI EM | ESGE | 4.9 | 0.26% |
