A Pleasant Surprise Among Emerging Markets ETFs

Considering the alleged headwinds presented by the mere presence of President Donald Trump in the White House, emerging markets exchange-traded funds, broadly speaking, have been a surprising asset class this year.

Trump, The U.S. And The Rest Of The World

Within that batch of surprises, there are more tactical ideas that are thriving including the WisdomTree China ex-State-Owned Enterprises Fund CXSE. To start 2017, the WisdomTree China ex-State-Owned Enterprises Fund is up about 10 percent, a decided advantage over the more than seven percent returned by the MSCI Emerging Markets Index.

What makes CXSE's surge to start 2017 a surprise is that the ETF's recent success belies concerns about US/China trade relations, which are becoming increasingly contentious with Trump in the White House.

Since it excludes state-run companies, CXSE allocates just under 14.5 percent of its weight to the financial services sector, a group that usually dominates traditional China ETFs. Additionally, the ETF features no energy exposure. Conversely, technology and consumer discretionary names combine for nearly 60 percent of the ETF's weight.

China, ETFs And Allocations

Traditional China ETFs that weight their holdings by market capitalization are usually chock full of government-run companies and that usually means massive allocations to energy, financial services, telecom and utilities sectors or some combination of that group.

“Despite all the trade rhetoric and fears Trump is going to instigate a trade war with China, it is interesting that China is the top standout in early 2017, particularly companies led by the Chinese consumer. If this trend continues and China’s growth can stay positive, that would be very supportive for global asset prices and market sentiment,” said WisdomTree in a note out Wednesday.

Underscoring CXSE's strong start to the year is the point that it was WisdomTree's best-performing emerging markets ETF in January. That is an accomplishment when considering the issuer offers nine emerging markets ETFs, including CXSE, and several other ex-US ETFs that have some exposure to developing economies.

“Over this period, Consumer Discretionary and Information Technology stocks in CXSE did particularly well. The Index that CXSE tracks before fees, the WisdomTree China ex-State-Owned Enterprises Index, emphasizes Consumer Discretionary and Information Technology and tilts away from Financials, Energy, Materials and Telecommunication Services,” added WisdomTree.