Vanguard files for new ex-China emerging markets ETF

Vanguard Group is launching an emerging markets ex-China ETF amid investor concerns over geopolitical risks and state intervention in China, joining a growing trend of such funds; this new ETF will debut later this summer with a low fee of 0.07%. While interest in ex-China funds has grown, recent performance of Chinese stocks has led to stronger flows into broad emerging market ETFs, with some analysts suggesting dedicated China allocations and ex-China products can coexist. The new Vanguard ETF will offer investors an alternative to its existing $85.9 billion Vanguard FTSE Emerging Markets ETF, which currently has 30% exposure to Chinese stocks, shifting exposure to companies in Taiwan and India.

Analysis

Vanguard Group is set to launch an Emerging Markets ex-China ETF, responding to investor concerns about geopolitical risks, state intervention in Chinese private markets, and the desire for discrete China allocation management. This initiative contributes to a growing niche, with two-thirds of the 13 existing ex-China EM ETFs having been launched since 2023, a year that saw China’s CSI300 index mark its third consecutive annual decline. However, recent market dynamics present a more nuanced outlook: flows into broad emerging market ETFs, which include China, have strengthened over the past two months, coinciding with a recovery in Chinese equities. Notably, the iShares China Large-Cap ETF has gained 35.34% over the last 12 months, significantly contributing to the 9.7% gain in the broad iShares MSCI Emerging Markets ETF, whereas the iShares MSCI Emerging Markets ex-China ETF returned only 4.8% in the same period. Vanguard's new offering, featuring a competitive fee of 0.07% compared to BlackRock's 0.25% for a similar product, will provide an alternative to its existing Vanguard FTSE Emerging Markets ETF (VWO), which has approximately $85.9 billion in assets and allocates around 30% to Chinese stocks. The new ex-China ETF will reallocate this exposure, leading to a substantial weighting in companies from Taiwan and India, which are expected to account for nearly 60% of its underlying index. Market commentary suggests that both dedicated China ETFs and emerging markets ex-China products will likely coexist, as China is considered "too large and too controversial to not be its own allocation."

Key Decisions for Investors

• Evaluate Vanguard's new low-fee ex-China EM ETF if seeking to mitigate direct China exposure due to geopolitical concerns or to manage China allocation with more granularity.
• Weigh the potential opportunity cost of excluding China, given its recent market rebound and significant contribution to the performance of broader emerging market ETFs.
• Assess the increased concentration in Taiwanese and Indian equities, projected to be nearly 60%, within the new Vanguard ex-China ETF to ensure alignment with overall portfolio diversification and risk tolerance.
• Consider employing a strategy that combines dedicated China-focused ETFs with emerging markets ex-China products to achieve a more tailored and flexible exposure to the diverse emerging market landscape.