The Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), the two largest emerging markets ETFs by assets, might sound like similar exchange traded funds, but how these two funds treat China is different and that is an important consideration for investors at a time when Chinese stocks are struggling.
VWO allocates 27.1% of its weight to Chinese stocks while EEM’s China weight is is 300 basis points less at just over 24%. The difference is attributable to VWO tracking a FTSE index while EEM benchmarks to the widely-followed MSCI Emerging Markets Index.
“The difference between the two funds is expected to widen because the two different indexes they follow will be treating Chinese stocks differently. FTSE Russell plans to begin adding onshore Chinese equities, known as A-shares, to new transitional emerging markets indexes, which it expects Vanguard to start following,” according to Reuters. http://www.reuters.com/article/2015/08/18/us-china-funds-exposure-idUSKCN0QN1QE20150818
In late May, FTSE Russell, VWO’s index provider, said it will transition China A-shares into global benchmarks. A week later, Vanguard said VWO will transition to the FTSE Emerging Markets All-Cap China Inclusion Index from the FTSE Emerging Index. FTSE Russell said China A-shares will account for about 5% of the FTSE Emerging Markets Index. [A-Shares ETFs Surge on FTSE News]
“The initial weighting of China A Shares in the FTSE Emerging inclusion indexes will be approximately 5%. This is expected to increase to 32% (at 31-March 2015 market values) when China A Shares are fully available to international investors, and hence resulting in Chinese stocks (including B-Share, H-Share, P Chips and Red Chips) to make up 50% of FTSE Emerging Index,” said FTSE Russell in a statement.