Emerging Markets: Honing a China Allocation | ETF Trends

The U.S. stock market has done so well that many investors may have forgotten about the rest of the world. Emerging markets, however, have a case to get back into investors’ portfolios. VettaFi’s recent Equity Symposium included a conversation on emerging markets with KraneShares’ CIO Brendan Ahern and Columbia Threadneedle’s Head of Strategic Beta Sales Jay McAndrew on the topic.

See more: This China Equities ETF Is Defying the Odds

Hosted by VettaFi’s Vice Chairman Tom Lydon, the discussion focused on finding the right allocation to EM’s biggest country, China, and how to play the rest of emerging markets, too. The country, due to its size, looms over the foreign investing landscape. Media headlines in the U.S. tend to misattribute tepid China returns to domestic politics alone, Ahern explained.

“Since the global financial crisis, the S&P 500 is up 924%, and MSCI China is only up 130%,” he noted.

“What do our minds say? ‘Well, that’s because China is a communist country,’” Ahern added. “But the problem with that rationale is that MSCI Latin America’s only up 139%. Are they all communists? Are they all dictatorships?”

The real issue, he explained, comes from the sector concentration on which emerging markets focus. Sectors like financials, energy, and industrials have lagged behind tech and growth in the U.S.

So, how, then, should investors approach China? McAndrew pointed out that one consistent theme he’s found on panels has emphasized avoiding China beta.

“Something I think both [Ahern] and I agree on is choosing your China wisely,” he said.

Emerging Markets, China, and ETFs

Instead, investors may want to find other China strategies or emerging market ETFs with less direct China exposure. KraneShares offers two intriguing options. First, the KraneShares MSCI Emerging Markets Ex China ETF (KEMX). Ahern pointed out that not only India appeals in non-China EM, but that Latin America offers opportunities.

KEMX charges 24 basis points (bps) for its approach, and has returned nearly 22% over the last one-year, per VettaFi data. It tracks the EGAI Emerging Markets ex-China Index, looking for mid and large-cap EM stocks weighted by market cap outside of China. While it avoids that country, it gets some benefits from positives in China, with Chinese firms investing to diversify supply chains to countries like Mexico and Vietnam.

For a more China-specific riff, however, KraneShares offers a strategy that takes advantage of the deep, liquid options market surrounding its flagship ETF, the KraneShares CSI China Internet ETF (KWEB). And that strategy, the KraneShares China Internet and Covered Call Strategy ETF (KLIP), offers strong annualized yields, Ahern said.

“That yields between a 40% and 50% annualized yield … to allow investors to ride out some of the media narrative, which we think is totally disconnected from the economic reality,” he explained.

For more news, information, and analysis, visit the China Insights Channel.