Does it make sense to exclude China from portfolio and/or EM

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zaplunken
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Does it make sense to exclude China from portfolio and/or EM

Post by zaplunken » Sat May 23, 2020 7:45 pm

I used the Google search feature here and only found 2 threads started this year about this. I read both, I got some ideas, but there was a fair amount of drift into frontier markets, government ownership, currency risk, so I want to ask something more specific.

I am almost 70. As of 5/15/2020 my AA is 42/58, International is 10.6% of the total AA and it is the Vanguard Total International Stock Market Index (TISMI). Per the Vanguard site, 23.5% of TISMI is EM and 10.1% of that is China so if my math is correct only 2.3% of TISMI is China. My China dollar holding in equities is barely 0.6% of the entire equity AA so it is very small.

My feeling lately is I do not want to invest in China [political, OT comment removed -mighty72] and if my returns suffer a bit from that I am OK with that choice.

I prefer to stay within Vanguard. Does Vanguard have a mutual fund (prefered) or ETF that is X-China other than the 3 funds mentioned in the next sentence? If not I could split the holdings in TISMI into the Vanguard European and Pacific Stock Indexes or the Vanguard Developed Markets Index (which seems to track TISMI as far as returns and expenses very closely and would mean just 1 vs 2 funds) but then I don't have any EM exposure.

1. How important is EM in an AA like mine? I suspect it isn't really much but I would like to be well diversified and hold EM.
2. I am certain many companies that are in the European and Pacific Stock Indexes as well as the Vanguard Developed Markets Index conduct business with China. So have I really cut China out of my portfolio or have I cut most of it out while completely cutting out EM?

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JoMoney
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Re: Does it make sense to exclude China from portfolio and/or EM

Post by JoMoney » Sat May 23, 2020 8:01 pm

zaplunken wrote:
Sat May 23, 2020 7:45 pm
....I am certain many companies that are in the European and Pacific Stock Indexes as well as the Vanguard Developed Markets Index conduct business with China. So have I really cut China out of my portfolio or have I cut most of it out while completely cutting out EM?
Not just the 'Developed Markets Index'... plenty of companies traded in the U.S. market have extensive exposure to China.
Apple, Disney, Nike, Starbucks, ... Caterpillar... and more...

Personally, I don't have any ex-U.S. 'international' allocation. I can't tell you what risks you're willing to take with your money or how much exposure you need for some 'optimal' diversification. Some people are very hopeful of explosive returns from Chinese stocks. I do believe there are additional risks there, whether or not taking that risk will be rewarded with some extra benefits isn't for us to know in advance.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Does it make sense to exclude China from portfolio and/or EM

Post by HEDGEFUNDIE » Sat May 23, 2020 8:03 pm

Please let us know when you've divested yourself of these S&P 500 holdings

Image

nix4me
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Re: Does it make sense to exclude China from portfolio and/or EM

Post by nix4me » Sat May 23, 2020 8:08 pm

I choose no international.

And do the best you can is the approach, can never be 100% free of china but you can proactively choose and try.

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Re: Does it make sense to exclude China from portfolio and/or EM

Post by jajlrajrf » Sat May 23, 2020 8:23 pm

It's an interesting question (although in another thread I'm trying to figure out how to get more China exposure, not less, since I'm reasonably convinced in the long term that's where a lot of the growth is going to be). Basically the right analogy here is to a EGS / Environmental and Social Responsibility investing - you have a certain political viewpoint, and you're willing to give up returns in order to pursue that viewpoint. The problem I'm having is your question "does it make sense to". Make sense in what sense? Financially? Almost surely not, if you are trying to judge based solely on returns. But if you view this as a point of principle that you're willing to pay money to support, it doesn't have to make sense to me, it just has to be what you want to spend your money on.

I'm reasonably sure if there's enough of a demand for that, someone will arise to satisfy it, as it has with EGS funds. If I was trying to do it today I think I would probably end up making my own index out of individual stocks, since as hedgefundie points out China's economy is deeply intertwined in most major US companies.

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zaplunken
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Re: Does it make sense to exclude China from portfolio and/or EM

Post by zaplunken » Sat May 23, 2020 8:27 pm

Please, I realize domestic as well as foreign companies do business with China. I can't avoid China completely, I want to cut out my direct investment where I can and not being in the TISMI is a way to accomplish that.

The question is does it make sense to not hold EM to avoid China? I realize there are some funds that are X-China but I'd prefer to stay within Vanguard.

If you can't answer that then I would appreciate you withhold posting about other investments that involve China that can not be avoided or would be very hard to avoid.

Thank you.

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Re: Does it make sense to exclude China from portfolio and/or EM

Post by jajlrajrf » Sat May 23, 2020 8:30 pm

Since China is a major player that has huge investments in emerging markets around the world, my belief is that it is effectively impossible to invest in emerging markets without substantial interaction with the Chinese economy. Others may disagree though!

EDIT: If you're willing to tolerate "interaction" in the sense I outlined, above, there is an MSCI index which is specifically ex-Asia: https://www.msci.com/documents/10199/38 ... 132dd747e0. If you can find an ETF tracking that, maybe it would fit the bill for you.

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Re: Does it make sense to exclude China from portfolio and/or EM

Post by Triple digit golfer » Sat May 23, 2020 8:35 pm

Yes, using the Developed Markets Index will eliminate stocks of companies domiciled in emerging markets, which eliminates stocks of companies domiciled in China, but also eliminates other emerging market countries like Brazil, India, and Russia.

But emerging markets are only about 23% of international, China is 42% of emerging markets, and international is 45% of world market cap. Thus, even if you invest at global market cap, you're only 4-5% in Chinese companies. If they perform poorly, it's not a large amount. If they perform well, then great. Why not just use total international?

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zaplunken
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Re: Does it make sense to exclude China from portfolio and/or EM

Post by zaplunken » Sat May 23, 2020 8:38 pm

jajlrajrf wrote:
Sat May 23, 2020 8:30 pm
Since China is a major player that has huge investments in emerging markets around the world, my belief is that it is effectively impossible to invest in emerging markets without substantial interaction with the Chinese economy. Others may disagree though!

EDIT: If you're willing to tolerate "interaction" in the sense I outlined, above, there is an MSCI index which is specifically ex-Asia: https://www.msci.com/documents/10199/38 ... 132dd747e0. If you can find an ETF tracking that, maybe it would fit the bill for you. But if that would work, why not just invest in the FTSE? I guess I don't understand the parameters here, happy for you to clarify them if you want.
Thanks. I tend to agree, I doubt there is an EM company or country that isn't involved with China. There is EMXC and another I forget the ticker. I think my answer is TISMI is such a small part of my holdings it doesn't matter and the Developed Market Index would eliminate all EM. It's really more the principal of investing directly via the TISMI.

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Re: Does it make sense to exclude China from portfolio and/or EM

Post by JoMoney » Sat May 23, 2020 8:48 pm

Yes, not holding 'Emerging Markets' to avoid China is the easiest way to do that at Vanguard.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Does it make sense to exclude China from portfolio and/or EM

Post by nisiprius » Sat May 23, 2020 8:49 pm

I am personally sympathetic to ESG investing, though I'm not holding any ESG funds myself. I don't feel any strong reason either to exclude China or to overweight China. And there are plenty of other countries I don't feel all that great about. Vanguard says that China accounts for about 10% of Vanguard Total International (not sure where you went wrong on your math), but I don't think that's enough to stress about. Personally I would just hold my nose and stick with Total International, just me.

However, to answer your question, web searches quickly turned up the existence of an index, the MSCI Emerging Markets ex China index, and an ETF that tracks it, iShares EMXC.

the iShares website is showing me an 0.25% net expense ratio, but only $39 million in assets; that seems awfully small.

I am simply reporting the results of a web search.
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zaplunken
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Re: Does it make sense to exclude China from portfolio and/or EM

Post by zaplunken » Sat May 23, 2020 8:57 pm

nisiprius wrote:
Sat May 23, 2020 8:49 pm
I am personally sympathetic to ESG investing, though I'm not holding any ESG funds currently. I don't feel any strong reason either to exclude China or to overweight China. I don't think the amount in Vanguard Total International (about 10%, not sure where you went wrong on your math) is enough to stress about. Personally I would just hold my nose and stick with Total International, just me.

However, to answer your question, web searches quickly turned up the existence of an index, the MSCI Emerging Markets ex China index, and an ETF that tracks it, iShares EMXC.

the iShares website is showing me an 0.25% net expense ratio, an uncomfortably-small-to-me $39 million in assets.

I am simply reporting the results of a web search.
China is 10.1% of the TISMI so I multiplied that by the 23% of TISMI that is EM. My mistake.

I did see the iShares EMXC.

So here is a different question. I know the TISMI is very tax efficient so in a Taxable account it is better than other international funds from a tax perspective. How tax efficient is the Developed Market Index?

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Re: Does it make sense to exclude China from portfolio and/or EM

Post by inbox788 » Sat May 23, 2020 9:02 pm

HEDGEFUNDIE wrote:
Sat May 23, 2020 8:03 pm
Please let us know when you've divested yourself of these S&P 500 holdings
Why?

What particular risk about China is OP concerned about? I don't think it's revenue exposure to China as much as production of raw materials, goods and services.

Some people may not want any trade at all, but IMO the main problem has been the balance of trade, and it's both big in size and imbalanced. These SP500 companies revenues are helping reduce that imbalance.

There's also imbalance in financial and capital investments, and it's not US vs China, but US vs ROW and China vs ROW, and simply eliminating China might simply transfer that imbalance to ROW, and may still maintain the US vs China imbalance indirectly.

In a diversified portfolio world balanced or US overweight, the amount of EM and China exposure is minor. Some people feel that risk/reward is greater (greater risk and greater reward) in EM long term as the nations develop, so you may not want to miss out if that's the case.

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Re: Does it make sense to exclude China from portfolio and/or EM

Post by helloyou » Sat May 23, 2020 10:51 pm

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: Does it make sense to exclude China from portfolio and/or EM

Post by Northern Flicker » Sat May 23, 2020 11:37 pm

zaplunken wrote:
Sat May 23, 2020 7:45 pm
.
I am almost 70. As of 5/15/2020 my AA is 42/58, International is 10.6% of the total AA and it is the Vanguard Total International Stock Market Index (TISMI). Per the Vanguard site, 23.5% of TISMI is EM and 10.1% of that is China so if my math is correct only 2.3% of TISMI is China?
10.1% of the Vanguard total int’l stock index fund VTIAX/VXUS is Chinese equity exposure, not 2.3%.
Index fund investor since 1987.

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Re: Does it make sense to exclude China from portfolio and/or EM

Post by annu » Sat May 23, 2020 11:43 pm

I was going to make changes along these lines, not due to any political reasons, but just feel there is a lot less transparency. But a mix of being distracted, a new bottle of red my wife got me, I somehow own 20% more in EM(VEMAX, vanguard eemerging market fund) than I did on Thursday :oops:

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Re: Does it make sense to exclude China from portfolio and/or EM

Post by galawdawg » Sun May 24, 2020 5:32 am

I happen to agree with Jack Bogle's view that there is no need to add an international index fund as a total US market index fund already provides international exposure due to the global footprint of US companies. So I have stuck with VTSAX for the equity portion of my portfolio.

And while past returns are no indication of future performance, Bogle's approach to international paid off for me. $10,000 invested in VTIAX (Total International Index, ER .11%) in 2010 would only be worth about $12,000 today while that same $10,000 invested in VTSAX (Total Stock Market, ER .04%) would be worth about $30,000. So by following Bogle's approach and avoiding international, I have realized a much significantly higher return during the thirty years I have been investing than if I had included international.

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Re: Does it make sense to exclude China from portfolio and/or EM

Post by LadyGeek » Sun May 24, 2020 7:33 am

I removed an off-topic post and reply. As a reminder, see: General Etiquette
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Re: Does it make sense to exclude China from portfolio and/or EM

Post by backofbeyond » Sun May 24, 2020 10:25 am

I've been a HUGE proponent of China stocks for years on this site. I had approx. 10% of my portfolio in the BAT stocks (Biden, Alibaba and Tencent) along with a handful of others.

Last Thursday, I sold them all. Why? It's not because I don't think they are great companies, but it's due to the anti China political climate which is on going. I can declare this without risk of breaking BH rules, because I'm not picking either side of the aisle. Both Dems and Rep have a beef with China and are making it very difficult to invest in them.

Covid has made a huge mark on China that at this point in time, I don't see settling down anytime soon.
The question isn't at what age I want to retire, it is at what income. - George Foreman

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