2016 Proving To Be Ideal Year To Exclude Stocks From China For This Emerging Market ETF

Throughout the exchange traded funds universe, there are scores of “ex” ETFs. There are ETFs that exclude U.S. stocks or other regions. Some are S&P 500 funds that exclude particular sectors.

It can be argued “ex” ETFs are a passive investment vehicle for market timing because the reality is what is being exclude will not be worth dismissing forever, but there are times when the ex should be the ex. When it comes to China and emerging markets ETFs, 2016 is proving to be an ideal year in which to exclude stocks from the world's second-largest economy.

The EGShares EM Core ex-China ETF XCEM does just that and the strategy is working. On the back of Tuesday's nearly 1.9 percent gain, XCEM was one of just over 100 ETFs to hit an all-time high yesterday. XCEM debuted in September.

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“Cutting China out of the emerging-market equation has been a winning strategy for a 10-month-old exchange-traded fund. The $8.9 million EGShares EM Core ex-China ETF has risen 23 percent this year to a record high, compared with a 11 percent gain in a $23.4 billion fund tracking MSCI Inc.’s developing-nation equity benchmark. The outperformance comes as mainland Chinese stocks post the second-worst performance among the world’s top 10 markets,” according to Bloomberg. 

The widely followed MSCI Emerging Markets Index allocates 25.2 percent of its weight to Chinese stocks, well above the index's second-largest country weight, which is South Korea at 14.4 percent.

Although XCEM excludes China, that doesn't mean the ETF is heavy on the most volatile emerging markets. For example, Brazil, India and Russia combine for a quarter of XCEM's weight compared to about 19 percent in the MSCI Index. South Korea and Taiwan, two of the least volatile developing markets, combine for 37 percent of XCEM's weight.

Even with China out of the equation, XCEM's sector weights are not widely different from the MSCI Emerging Markets Index. For example, XCEM devotes 49.2 percent of its combined weight to financial services and technology stocks. The combined weight to those sectors in the MSCI benchmark is over 48 percent.

Consumer stocks are 18.4 percent of the MSCI Emerging Markets Index and 17.2 percent of XCEM's lineup.