Emerging Market Stocks Funds too exposed to China

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Always passive
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Emerging Market Stocks Funds too exposed to China

Post by Always passive » Wed May 20, 2020 2:30 am

Are there any EM funds/ETFs with less exposure to China? Most are over 30% of the fund

Valuethinker
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Re: Emerging Market Stocks Funds too exposed to China

Post by Valuethinker » Wed May 20, 2020 3:37 am

Always passive wrote:
Wed May 20, 2020 2:30 am
Are there any EM funds/ETFs with less exposure to China? Most are over 30% of the fund
https://www.morningstar.co.uk/uk/etf/sn ... entType=FE

ishares Emerging Market Dividend Fund IEDY

https://www.morningstar.co.uk/uk/etf/sn ... 0P0001F9QM

ishares Emerging Market Value EMVL

Both of these are Irish-domiciled, UCITS compliant. So not US funds.

Both of these have strong value tilts that reduce the impact of China in the IEDY case (in the EMVL case there is still a big Chinese weighting, but it is away from the highly valued stocks). If you look at the price to book ratios they are c. 0.65 against the EM index (i.e. quite value-sy).

Both of these have had horrible recent performance as financials and commodity producers have done particularly badly. Both are quite small ETFs so they may be merged/ closed at some point (EMVL is quite new, though).

Certainly the former is one way to reduce impact of China. Otherwise, you would need to index against the individual regional indices (Emerging Europe, Asia Pac ex China etc.). Note that one tends to wind up with a big weighting in Taiwan - not the same thing, but perhaps closer than other markets. I can't work out whether the current trade spats benefit or hurt Taiwan but the largest Taiwanese company (Taiwan Semiconductor - TSMC c. 25% of the index) is building a major new plant in Arizona (and has one in Oregon) which may help.
Last edited by Valuethinker on Wed May 20, 2020 6:01 am, edited 1 time in total.

columbia
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Re: Emerging Market Stocks Funds too exposed to China

Post by columbia » Wed May 20, 2020 5:36 am

iShares MSCI Emerging Markets ex China ETF
https://www.ishares.com/us/products/288504/
If you leave your head in the sand for too long, you might get run over by a Jeep.

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Re: Emerging Market Stocks Funds too exposed to China

Post by Valuethinker » Wed May 20, 2020 6:00 am

columbia wrote:
Wed May 20, 2020 5:36 am
iShares MSCI Emerging Markets ex China ETF
https://www.ishares.com/us/products/288504/
Albeit a US domiciled product.

Most of us want to avoid those, OP is Israeli, not sure what the situation is.

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galeno
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Re: Emerging Market Stocks Funds too exposed to China

Post by galeno » Wed May 20, 2020 6:28 am

We use two ETFs with EM. One without

80% VWRD (World LCs) is 10% EM and has 4.4% in China.

10% VDEM (EM) is 100% EM has 43.5% in China.

10% WSML (World SCs) is 0% EM and has 0% in China.

Our equity allocation has 7.8% in China.
Last edited by galeno on Wed May 20, 2020 5:26 pm, edited 1 time in total.

HawkeyePierce
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Re: Emerging Market Stocks Funds too exposed to China

Post by HawkeyePierce » Wed May 20, 2020 9:31 am

I split my EM allocation between stocks and bonds to limit exposure to China. Half VWO, half VWOB.

HEDGEFUNDIE
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Re: Emerging Market Stocks Funds too exposed to China

Post by HEDGEFUNDIE » Wed May 20, 2020 9:38 am

Share dilution is a serious issue, it’s why I am partial to active managers in China.

For example, Matthews Funds, which has continuously beaten the index for 10 years running:

https://www.portfoliovisualizer.com/fun ... chmark=FXI

TeeDee
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Re: Emerging Market Stocks Funds too exposed to China

Post by TeeDee » Wed May 20, 2020 9:41 am

Cue the “past performance is not..”

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Re: Emerging Market Stocks Funds too exposed to China

Post by HEDGEFUNDIE » Wed May 20, 2020 9:44 am

TeeDee wrote:
Wed May 20, 2020 9:41 am
Cue the “past performance is not..”
“...unless such past outperformance was driven by reasonable first principles that are expected to hold going forward”

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Re: Emerging Market Stocks Funds too exposed to China

Post by TeeDee » Wed May 20, 2020 9:46 am

HEDGEFUNDIE wrote:
Wed May 20, 2020 9:44 am
TeeDee wrote:
Wed May 20, 2020 9:41 am
Cue the “past performance is not..”
“...unless such past outperformance was driven by reasonable first principles that are expected to hold going forward”

I like it. Maybe you can put that underneath the other warning for your hedge fund prospectus

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Re: Emerging Market Stocks Funds too exposed to China

Post by willthrill81 » Wed May 20, 2020 9:48 am

TeeDee wrote:
Wed May 20, 2020 9:46 am
HEDGEFUNDIE wrote:
Wed May 20, 2020 9:44 am
TeeDee wrote:
Wed May 20, 2020 9:41 am
Cue the “past performance is not..”
“...unless such past outperformance was driven by reasonable first principles that are expected to hold going forward”

I like it. Maybe you can put that underneath the other warning for your hedge fund prospectus
I believe that he basically did.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Emerging Market Stocks Funds too exposed to China

Post by HEDGEFUNDIE » Wed May 20, 2020 9:48 am

TeeDee wrote:
Wed May 20, 2020 9:46 am
HEDGEFUNDIE wrote:
Wed May 20, 2020 9:44 am
TeeDee wrote:
Wed May 20, 2020 9:41 am
Cue the “past performance is not..”
“...unless such past outperformance was driven by reasonable first principles that are expected to hold going forward”

I like it. Maybe you can put that underneath the other warning for your hedge fund prospectus
It doesn’t need to be said, as it’s implied with any investment strategy, including the three fund strategy.

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Phineas J. Whoopee
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Re: Emerging Market Stocks Funds too exposed to China

Post by Phineas J. Whoopee » Wed May 20, 2020 6:41 pm

Or, from another thread, not enough.
PJW

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Re: Emerging Market Stocks Funds too exposed to China

Post by pascalwager » Wed May 20, 2020 8:59 pm

Always passive wrote:
Wed May 20, 2020 2:30 am
Are there any EM funds/ETFs with less exposure to China? Most are over 30% of the fund
Vanguard EM Fund is at 43% China right now.
Vanguard Total Int'l Stock Fund EM portion is at 43% China.
DFA EM Fund is at 30% China.

I'm getting the impression that China investing is silly.
Retired, pension, no SS | Vg TSM/TISM, DFA large value/small cap | 50/50 US/intl | 55/45 S/B | Bond funds: TIPS, TBM, LTT

dh
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Re: Emerging Market Stocks Funds too exposed to China

Post by dh » Wed May 20, 2020 9:13 pm

Dimensional Fund's (DFA) Emerging Market Fund is approximately 20%-25% in China. If I recall correctly it has a relatively high percentage of holdings in Taiwanese stocks (15%-20%).

Having reported that, I don't think Vanguard's EM fund being 40+% in China is "wrong." I was just replying to the OPs request.

dboeger1
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Re: Emerging Market Stocks Funds too exposed to China

Post by dboeger1 » Wed May 20, 2020 9:29 pm

OP, I'm curious, why do you think EM funds are too exposed to China? It is the world's 2nd-largest economy. I realize there are all kinds of issues and risks with China's market, such as lack of exposure to much of China's growth, lack of transparency, ties to state-owned enterprises, etc. But even so, I would think 30% of an EM fund in China would still seem quite reasonable. Would you rather overweight countries like Morocco or Ukraine? I'm legitimately curious because I own 100% VTWAX, so I just like to hold the global markets cap-weighted, but I wonder if I'm missing something.

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Re: Emerging Market Stocks Funds too exposed to China

Post by grabiner » Wed May 20, 2020 9:55 pm

The main issue is that having a lot of money in China exposes you to a significant single-country risk.

However, it doesn't matter what portion of your emerging-markets stock fund is in China; it matters what portion of your total portfolio is in China. I have an 88%-stock portfolio, and I overweight emerging markets, but even so, only 16% of my portfolio is in emerging markets (would be 9% at the market weight, if I held Vanguard Total World Stock), and thus only 7% is in China.
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Patzer
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Re: Emerging Market Stocks Funds too exposed to China

Post by Patzer » Wed May 20, 2020 10:10 pm

dboeger1 wrote:
Wed May 20, 2020 9:29 pm
OP, I'm curious, why do you think EM funds are too exposed to China? It is the world's 2nd-largest economy. I realize there are all kinds of issues and risks with China's market, such as lack of exposure to much of China's growth, lack of transparency, ties to state-owned enterprises, etc. But even so, I would think 30% of an EM fund in China would still seem quite reasonable. Would you rather overweight countries like Morocco or Ukraine? I'm legitimately curious because I own 100% VTWAX, so I just like to hold the global markets cap-weighted, but I wonder if I'm missing something.
Not the OP, but in my opinion, there is no extra return for Chinese stocks, because of the reasons you listed.
That makes these uncompensated risks, and don't tell me it's priced in. That would imply reasonable and fair price discovery in Chinese stocks, which the factors you listed severely obscure.
The same is true for several of the EM markets, but at least they make up smaller portions of the Index.

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Re: Emerging Market Stocks Funds too exposed to China

Post by DaufuskieNate » Thu May 21, 2020 5:41 am

When comparing the emerging markets funds of Vanguard and DFA, it is important to remember that Vanguard includes Korea in DM while DFA includes it in EM. The DFA core EM fund DFCEX has about 14% in Korea and 30% in China. Without Korea, the DFA fund would have about 35% in China. This would be the apples-to-apples comparison with Vanguard.

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Re: Emerging Market Stocks Funds too exposed to China

Post by stormcrow » Thu May 21, 2020 7:13 am

Patzer wrote:
Wed May 20, 2020 10:10 pm

That makes these uncompensated risks, and don't tell me it's priced in. That would imply reasonable and fair price discovery in Chinese stocks, which the factors you listed severely obscure.
For a great current example, see Luckin Coffee (LK).

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Re: Emerging Market Stocks Funds too exposed to China

Post by pascalwager » Thu May 21, 2020 9:29 pm

pascalwager wrote:
Wed May 20, 2020 8:59 pm
Always passive wrote:
Wed May 20, 2020 2:30 am
Are there any EM funds/ETFs with less exposure to China? Most are over 30% of the fund
Vanguard EM Fund is at 43% China right now.
Vanguard Total Int'l Stock Fund EM portion is at 43% China.
DFA EM Fund is at 30% China.

I'm getting the impression that China investing is silly.
Turns out China is only 2.8% of my total portfolio, so I guess I'll just sit on it for now.
Retired, pension, no SS | Vg TSM/TISM, DFA large value/small cap | 50/50 US/intl | 55/45 S/B | Bond funds: TIPS, TBM, LTT

dboeger1
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Re: Emerging Market Stocks Funds too exposed to China

Post by dboeger1 » Fri May 22, 2020 7:32 pm

Patzer wrote:
Wed May 20, 2020 10:10 pm
dboeger1 wrote:
Wed May 20, 2020 9:29 pm
OP, I'm curious, why do you think EM funds are too exposed to China? It is the world's 2nd-largest economy. I realize there are all kinds of issues and risks with China's market, such as lack of exposure to much of China's growth, lack of transparency, ties to state-owned enterprises, etc. But even so, I would think 30% of an EM fund in China would still seem quite reasonable. Would you rather overweight countries like Morocco or Ukraine? I'm legitimately curious because I own 100% VTWAX, so I just like to hold the global markets cap-weighted, but I wonder if I'm missing something.
Not the OP, but in my opinion, there is no extra return for Chinese stocks, because of the reasons you listed.
That makes these uncompensated risks, and don't tell me it's priced in. That would imply reasonable and fair price discovery in Chinese stocks, which the factors you listed severely obscure.
The same is true for several of the EM markets, but at least they make up smaller portions of the Index.
Are long-term returns really so closely correlated with reasonable/fair price discovery though? It sounds like you're asserting that long-term growth in Chinese companies won't be compensated because of today's lack of transparency, for example. But didn't Bogle himself reject the EMH and the idea that long-term returns were dependent on current pricing? In other words, I have no idea whether Chinese equities are over- or under- valued today, but I expect them to be higher in 30 years assuming positive growth (and I diversify internationally in the event that any given country doesn't grow). That's why consistently investing in US equities has been good despite times like the dot-com bubble. And sure, you could point at Japan, but Japan is a very unique outlier because of the extraordinary magnitude of its bubble followed by a very long period of stagnation. That may or may not be the case in China, but I don't have any reason to believe the risk of that is so great that I should underweight it from a global cap-weighted starting point.

My biggest concern with regards to Chinese equities' long-term returns is actually the concentration of growth outside of publicly traded companies. China has a lot of private equity, state-owned enterprises, capital controls, etc. The extent to which Chinese stocks will grow with the Chinese economy could be very minimal, unlike US stocks which really do represent a significant and diverse portion of the total market. But cap-weighting kind of takes care of that in my mind, because it's not like VTWAX holds Chinese stocks in the same proportion as China's share of global GDP.

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Re: Emerging Market Stocks Funds too exposed to China

Post by canadianbacon » Fri May 22, 2020 8:20 pm

pascalwager wrote:
Wed May 20, 2020 8:59 pm
Always passive wrote:
Wed May 20, 2020 2:30 am
Are there any EM funds/ETFs with less exposure to China? Most are over 30% of the fund
Vanguard EM Fund is at 43% China right now.
Vanguard Total Int'l Stock Fund EM portion is at 43% China.
It's a bit higher, even, when you realize that Naspers (#5 holding), although South African, derives a lot of its value from owning 31% of Tencent.
Bulls make money, bears make money, pigs get slaughtered.

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Re: Emerging Market Stocks Funds too exposed to China

Post by Patzer » Fri May 22, 2020 11:05 pm

dboeger1 wrote:
Fri May 22, 2020 7:32 pm
Are long-term returns really so closely correlated with reasonable/fair price discovery though? It sounds like you're asserting that long-term growth in Chinese companies won't be compensated because of today's lack of transparency, for example. But didn't Bogle himself reject the EMH and the idea that long-term returns were dependent on current pricing? In other words, I have no idea whether Chinese equities are over- or under- valued today, but I expect them to be higher in 30 years assuming positive growth (and I diversify internationally in the event that any given country doesn't grow).
Bogle also said he saw no reason for US investors to buy international stocks.

I invest in stocks, because I believe the companies I purchase will act in the best interest of their investors and will create value over time, which will result in them being worth more in the future.
I do not buy stocks just because I think someone might pay me more for it in the future. If I did, I would probably try to gamble on Bitcoin not Chinese stocks.
dboeger1 wrote:
Fri May 22, 2020 7:32 pm
My biggest concern with regards to Chinese equities' long-term returns is actually the concentration of growth outside of publicly traded companies. China has a lot of private equity, state-owned enterprises, capital controls, etc. The extent to which Chinese stocks will grow with the Chinese economy could be very minimal, unlike US stocks which really do represent a significant and diverse portion of the total market. But cap-weighting kind of takes care of that in my mind, because it's not like VTWAX holds Chinese stocks in the same proportion as China's share of global GDP.
Valid concerns..
China's GDP has tripled over the last decade, but FXI (China Large Cap ETF) is actually down in that time period (as is VWO).
It doesn't seem like there is much correlation between Chinese GDP growth and any returns I might get from owning their stocks.

I do diversify internationally, mostly to developed markets, but I do not see a compelling reason to own Chinese stocks.

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HomerJ
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Re: Emerging Market Stocks Funds too exposed to China

Post by HomerJ » Fri May 22, 2020 11:36 pm

Patzer wrote:
Fri May 22, 2020 11:05 pm
China's GDP has tripled over the last decade, but FXI (China Large Cap ETF) is actually down in that time period (as is VWO).
It doesn't seem like there is much correlation between Chinese GDP growth and any returns I might get from owning their stocks.
This.

China seems to be a scam.

I own Vanguard Emerging Markets Index Fund in a ROTH IRA for the past 10 years. Never added to it, never pulled from it.. Reinvested all dividends.

It's basically flat after 10 years.

But it's a tiny part of my portfolio, so I will continue to hold it, at least for another 10 years... Curious to see if it ever actually grows.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”

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Re: Emerging Market Stocks Funds too exposed to China

Post by helloyou » Sat May 23, 2020 1:13 am

Just looking at MCHI (iShares for China) and you'll see the 2011-2019 return is not even 8% OVER THE ENTIRE PERIOD... Considering the tech boom of Alibaba, Tencent, Xiaomi and dozens of other billion dollar companies we are still witnessing very poor public equity correlation. And I am not even mentioning the rise of the finance, construction and real estate sectors and the overall consumer economy...

I am not sure of the reason behind this but to me this is not a reliable investment, and if you add the rising US-China tensions that makes the whole thing a no go for me. I would still prefer to invest in a S&P500 or world tracker than overweighting China too much (or any other emerging markets as the other ones are too correlated to US)

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Re: Emerging Market Stocks Funds too exposed to China

Post by Elysium » Sat May 23, 2020 8:17 am

HomerJ wrote:
Fri May 22, 2020 11:36 pm
I own Vanguard Emerging Markets Index Fund in a ROTH IRA for the past 10 years. Never added to it, never pulled from it.. Reinvested all dividends.

It's basically flat after 10 years.
China may not be at fault for this, but the other "emerging" markets are the culprits. Looking at VWO returns compared to the larger china ETFs, FXI, MCHI, or GXC, there is a fairly large lag for VWO, this has to be coming from other components.

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Re: Emerging Market Stocks Funds too exposed to China

Post by Patzer » Sat May 23, 2020 10:57 am

Elysium wrote:
Sat May 23, 2020 8:17 am
HomerJ wrote:
Fri May 22, 2020 11:36 pm
I own Vanguard Emerging Markets Index Fund in a ROTH IRA for the past 10 years. Never added to it, never pulled from it.. Reinvested all dividends.

It's basically flat after 10 years.
China may not be at fault for this, but the other "emerging" markets are the culprits. Looking at VWO returns compared to the larger china ETFs, FXI, MCHI, or GXC, there is a fairly large lag for VWO, this has to be coming from other components.
Yes, many of the Emerging Markets are just as unreliable as China or worse.

My international equity is: VEA(Developed) + EWT(Taiwan) (at market weight as if it were part of VEA)

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