Emerging Market ETFs Feel The Pain Of China Collapse

The selling in Chinese stocks has shown no signs of abatement in recent days, as double digit losses have quickly eroded much of this year’s gains.

This sudden collapse has most notably affected single country exchange-traded funds such as the iShares FTSE/Xinhua China 25 Index (ETF) FXI, which has dropped more than 19 percent over the last month. While investing in specific foreign countries can be risky, even more diversified emerging market ETFs have experienced the spreading pain of China’s drop.

The China Effect: ETFs

The Vanguard Emerging Markets Stock Index Fd VWO and iShares MSCI Emerging Markets Indx (ETF) EEM have both fallen over 6 percent in the early days of July, in what appears to be a sharp correction. VWO and EEM are the largest diversified emerging market equity funds with over $73 billion in combined assets.

In both indices, China holds the top spot in terms of percentage allocation to a single nation. Currently publicly traded Chinese companies make up 23 percent of EEM and 28 percent of VWO. Other top emerging market countries in these indices include Taiwan, South Korea, India, South Africa and Brazil.

Related Link: How China's Crash Affects Stocks Trying To Go Private

Overweight China

The overweight nature of China’s influence is due to the market-cap weighted construction methodology of each fund. In addition, China’s status as a mega-economy will mean that the repercussions from a decline will be felt in other peripheral areas of the global marketplace.

Other Emerging Stocks Dealing With Volatility

Emerging market stocks are also contending with the recent volatility in the United States Oil Fund LP (ETF) USO and PowerShares DB Base Metals Fund (ETF) DBB, which have experienced steep declines in recent weeks. Many of these nations are rich in natural resources and heavily dependent on the strength of commodity prices to sustain their burgeoning economic activity.

One fund that has ridden the elevator down to a softer landing is the iShares MSCI Emerging Markets Minimum Volatility ETF (iShares Inc. EEMV). As its name implies, this ETF selects a smaller universe of emerging market stocks with a historical penchant for lower volatility.

While EEMV has still experienced a significant decline from its highs, it is outperforming EEM by 3.40 percent so far this year.

Disclosure: At the time this article was written, some clients of FMD Capital Management owned shares of VWO. 

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