It’s difficult for foreign investors to obtain independently verifiable data about Chinese company performance or fundamentals because the government so tightly controls what investors see. The Luckin Coffee delisting from Nasdaq due to fraud is a recent example. Broad-based emerging market ETFs are supposed to provide diversification, but that’s a tall order when a third of the portfolio (or more) is invested in the equities of a single country-especially when the valuations of said equities can be suspect. However, there are many reasons an emerging market investor might want an ETF that forgoes China equities. Meanwhile, the ETF with the most exposure to China stocks is the $143 million iShares MSCI BRIC ETF (BKF), with a whopping 71% of its portfolio in China (Figure 1). The largest EM fund, the $62 billion Vanguard FTSE Emerging Markets Equity ETF (VWO), puts 44% of its portfolio in China, while the second-largest ETF, the $56 billion iShares Core MSCI Emerging Markets Equity ETF (IEMG), allocates 39%. Many ETFs have much higher exposures, though. That translates to roughly $72 billion of total invested assets in EM equity ETFs. In emerging markets, China exposure is ubiquitous: The average emerging market (EM) ETF (excluding leveraged, inverse and defined outcome ETFs) places about 32% of its portfolio in China stocks. Increasingly, many investors are seeking a more finely tailored approach to the country-if they want exposure to it at all. Yet there are significant risks to investing in China, from concentration risk to valuation concerns. The Asian country’s presence looms large in market-capitalization-weighted and smart beta strategies alike roughly a third of all emerging market ETF assets now are invested in Chinese equities. China is by far the largest emerging economy in fact, it’s the second-largest economy in the world, after only the U.S. For many investors, “emerging markets” is synonymous with China-for good reason.
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