EMXC: This Emerging Markets ETF Is Perfect For China Bears

seekingalpha03-16

Tanaonte/iStock via Getty ImagesI last covered the iShares MSCI Emerging Markets ex China ETF (NASDAQ:EMXC) in early 2023. In that article, I argued that EMXC provided diversified exposure to emerging...

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In that article, I argued that EMXC provided diversified exposure to emerging...</p>\n\n<a href=\"https://seekingalpha.com/article/4678593-emxc-this-emerging-markets-etf-is-perfect-for-china-bears\">Source Link</a>\n\n</div>\n","source":"seekingalpha_fund","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>EMXC: This Emerging Markets ETF Is Perfect For China Bears</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nEMXC: This Emerging Markets ETF Is Perfect For China Bears\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-03-16 05:33 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4678593-emxc-this-emerging-markets-etf-is-perfect-for-china-bears><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Tanaonte/iStock via Getty ImagesI last covered the iShares MSCI Emerging Markets ex China ETF (NASDAQ:EMXC) in early 2023. In that article, I argued that EMXC provided diversified exposure to emerging...</p>\n\n<a href=\"https://seekingalpha.com/article/4678593-emxc-this-emerging-markets-etf-is-perfect-for-china-bears\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU2491050154.USD","symbol_name":"WELLINGTON SUSTAINABLE OUTCOMES \"A\" (USD) ACC","start_time":0,"source_url":"https://seekingalpha.com/article/4678593-emxc-this-emerging-markets-etf-is-perfect-for-china-bears","article_id":"2419364611","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1497140524/image_1497140524.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2419364611","pubTimestamp":1710538436,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Tanaonte/iStock via Getty ImagesI last covered the iShares MSCI Emerging Markets ex China ETF (NASDAQ:EMXC) in early 2023. 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In that article, I argued that EMXC provided diversified exposure to emerging market equities, and that its exclusion of Chinese issuers would be beneficial in case of a Chinese invasion of Taiwan. EMXC has underperformed the S&P 500 since, somewhat underperforming expectations.   EMXC Previous ArticleOverall, I believe that there are stronger emerging market ETFs out there, including the Cambria Emerging Shareholder Yield ETF (BATS:EYLD), and the Avantis Emerging Markets Value ETF (NYSEARCA:AVES). EMXC is much less exposed to Chinese stocks than EYLD, AVES, and most other international equity ETFs, and so the fund remains an interesting choice for investors in international equities concerned about the Chinese market. EMXC - Overview and Analysis Index and Portfolio EMXC is an equity index ETF focusing on emerging market equities, explicitly excluding Chinese stocks, and tracking the MSCI Emerging Markets ex China Index. It is a relatively simple index, including all relevant emerging market equities subject to a basic set of liquidity, trading, size, and country of origin criteria. It is a market-cap weighted index. EMXC's underlying index is quite broad, which results in a reasonably well-diversified emerging market equity fund, with investments in over 700 companies, exposure to most industry segments, and investments in dozens of countries. Looking at the holdings themselves, the fund invests in a couple household names, including Taiwan Semiconductor (NYSE: TSM) and Samsung (OTCPK:SSNLF). EMXC Looking at industry exposures, the fund is significantly overweight financials, as it is common for the larger emerging market banks to be publicly traded. It is also moderately overweight materials and energy, large industries in most emerging markets. On the flipside, the fund is significantly underweight healthcare, as emerging market countries rarely have significant pharmaceutical or biotech companies. EMXC is moderately underweight consumer discretionary and communication services, presumably for similar reasons. Importantly, the fund is only slightly underweight tech, much less than the average international equity ETF. Compare EMXC's industry exposures with those of the S&P 500. Etfrc.comLooking at countries, the fund invests quite heavily in India, Taiwan, and South Korea, with smaller investments in several other emerging market countries.   EMXC EMXC provides diversified exposure to emerging market equities sans China. This is a rather specific equity market niche, and does not include most of the larger markets, including the U.S. and Europe, and companies, including mega-cap tech, of the world. EMXC does not provide broad exposure to global equity markets as a whole, just a specific market niche. Due to this, I would keep position sizes small, and would not consider the fund as a core portfolio holding. Valuation Analysis EMXC's most significant benefit is its cheap valuation, with the fund trading at a significant discount to U.S. equities, although a slight premium to broader emerging market and international equity indexes.   Morningstar - Table by AuthorEMXC's cheap valuation is due to several factors. Emerging market equities are riskier, and perceived as such, so command lower valuations than equities from developed countries, especially the United States. Risks include foreign currency risk, corporate governance issues, and less stable, resilient economies. Corporate earnings growth has been particularly strong in the U.S. these past few years, supporting premium valuations relative to other markets. This is at least partly due to timing, with the U.S. experiencing lower, more uneven growth in prior decades. Emerging markets are expected to see stronger growth than the U.S. moving forward, however, although it is corporate earnings that actually matter for equities.   JPMorgan Guide to the MarketsFinally, sentiment has undoubtedly played a role, as evidenced by widening valuation gaps between U.S. and international equities.   JPMorgan Guide to the MarketsAs can be seen above, valuation gaps have widened since around 2009, but have stabilized since around 2021. International and emerging market equities have seen some gains, and some periods of outperformance, these past few years, but valuations remain stuck at very low levels. EMXC's cheap valuation could lead to significant capital gains and market-beating returns moving forward, assuming valuations normalize. That is a big assumption, and not one which is certain to occur. EMXC also lacks a clear catalyst or way to leverage its cheap valuation, unlike some of its peers. As an example, the EYLD focuses on emerging market equities with strong shareholder yields, meaning dividends and buybacks. Both of these are particularly impactful for cheap companies, and could function as a catalyst of sorts: higher dividends could increase investor demand, buybacks boost EPS which could have a similar effect. Overall, EMXC's cheap valuation is an important benefit for shareholders, but it is a somewhat uncertain one, and one which has not lived up to its potential in the past. Performance Analysis EMXC's performance track-record is mediocre, at best, with the fund significantly underperforming the S&P 500 since inception, and for most relevant time periods. It has slightly underperformed emerging market equity indexes, outperformed international ones, since inception, both somewhat inconsistently.   Data by YChartsOn a more positive note, performance has materially improved these past few years, and since I first covered the fund. Although EMXC continues to underperform the S&P 500, it does so by much less than before, and absolute returns are still quite good. Performance remains below-average, but it was mediocre before. EMXC's poor performance track-record is an important negative for shareholders, but fundamentals and future prospects both remain strong. Remember, valuation gaps between international and U.S. equities have widened for over a decade, so EMXC's underperformance is to be expected. Insofar as valuations recover, performance should improve. China Analysis EMXC offers investors exposure to cheap, high-growth emerging market equities, but so do many other funds. What sets EMXC apart is the fund's explicit exclusion of Chinese securities. China suffers from a unique set of issues and risks when compared to other emerging market equities. Understanding these is important to understand EMXC's value proposition. Let's have a quick look at these. Chinese stocks suffer from significant regulatory and political risk. China's economy is managed, some might say mismanaged, by the country's ruling party, to a much greater degree than in most other countries. Unfavorable treatment from the country's central government could lead to significant losses to investors, with investors losing over $1.1 trillion dollars due to the country's ongoing tech crackdown. Conditions seem to be easing, but I'm not an expert on Chinese politics, and neither are most investors. Foreign investors in Chinese stocks also face a unique set of risks. Some context first. In most cases, foreign investors can't actually invest in mainland Chinese stocks. Foreign investors can invest in offshore shell companies with complicated contractual arrangements, whose sole purpose is to sidestep relevant Chinese regulations and laws, while mimicking an investment in mainland Chinese stocks. These offshore companies and arrangements are of questionable legality. Matt Levine has a fantastic, more in-depth explanation of these issues here, but that's the gist of it. As should be clear from the above, investing in Chinese stocks as a foreigner is (generally) extremely risky. Current arrangements are on unclear legal footing, and although the Chinese government does not seem currently inclined to take action against these, things might change moving forward. Importantly, Chinese companies are well aware of these risks, and quite forthcoming about them too. This is an old example, but DiDi (DIDI), a large Chinese ride-hailing app and company, had this to say about these arrangements:  In the opinion of our PRC legal counsel, Fangda Partners, (i) the ownership structure (...) is not in violation of mandatory provisions of applicable PRC laws and regulations currently in effect (...) However, we have been further advised by our PRC legal counsel that there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. Thus, the PRC government may ultimately take a view contrary to the opinion of our PRC legal counsel. (...) the relevant governmental authorities would have broad discretion in dealing with such violation (Source: DiDi Sec Filings)  In simple terms, DiDi's lawyers think their current arrangement is legal, but they genuinely don't know, and perhaps the Chinese government thinks otherwise. The Chinese government has wide discretion in these matters, so, in practice, investors are at their mercy. Finally, China aims to reunify with Taiwan, by force if necessary. A Chinese invasion of Taiwan would almost certainly disrupt both economies and send stocks cratering. China would likely be sanctioned by the U.S. and Europe, leading to further losses. I can't say I find a Chinese invasion of Taiwan all that likely, but I'm not a military analyst, and I was blindsided by the Ukraine War too. In my opinion, although the issues above are not existential, they are significant enough to warrant reducing exposure to Chinese stocks. For emerging market equity investors, EMXC does just that. Conclusion  EMXC's cheap valuation makes the fund a buy, while its exclusion of Chinese stocks reduces risk relative to other emerging market equity ETFs.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2419364611"}