WisdomTree has launched a new ETF in the US providing broad emerging markets exposure while avoiding stocks from China.
Jeremy Schwartz, Global Chief Investment Officer at WisdomTree.
The WisdomTree Emerging Markets ex-China Fund (XC US) has been listed on NYSE Arca with an expense ratio of 0.32%.
The fund offers investors the ability to unpack China from their emerging markets portfolios, allowing them to then separately and more precisely manage their allocation to the Asian superpower.
Jeremy Schwartz, Global Chief Investment Officer at WisdomTree, said: “As the Chinese market capitalization ballooned over the last two decades, investors with broad emerging markets exposure now have approximately one-third of their exposure in a market that is experiencing an incredible amount of both headwinds and tailwinds, making it complicated to implement specific asset allocation views.
“XC will allow investors to combine with other China-specific exposures – like the WisdomTree China ex-State-Owned Enterprises Fund (CXSE US) – to scale their exposure to any desired balance between China and other emerging markets.”
There are already several EM ex-China ETFs available in the US, the largest being the $2.3 billion iShares MSCI Emerging Markets ex-China ETF (EMXC US) which is priced slightly cheaper than XC with an expense ratio of 0.25%.
Where WisdomTree seeks to stand apart from its competitors, however, is by including an ESG overlay as well as incorporating the firm’s signature EM methodology of removing state-owned enterprises (SOEs), a process that aims to deliver a more efficient beta exposure by avoiding companies that may be prone to mismanagement.
Methodology
The fund is linked to the proprietary WisdomTree Emerging Markets ex-China Index which consists of stocks from emerging markets, excluding China, with market capitalizations greater than $1 billion and average daily trading volumes above $100,000.
WisdomTree first screens out violators of global norms as well as firms with significant operations linked to tobacco, thermal coal, and controversial weapons.
The index then removes SOEs which are defined as companies with government ownership greater than 20%. In particular, the methodology tends to exclude unprofitable banks and financial firms, while also potentially delivering enhanced risk/return metrics in capital-intensive sectors such as energy and industrials.
The index weights its constituents by float-adjusted market capitalization while setting country weights equal to the starting universe (i.e. the EM ex-China universe that includes SOEs) and limiting deviations in sector weights to within 3% of the starting universe.
According to WisdomTree, the resulting index exhibits slight portfolio tilts toward higher growth sectors such as consumer discretionary, health care, and communication services compared to existing EM ex-China alternatives.
As of 23 September, stocks from India and Taiwan dominated with weights of 28.0% and 23.1%, respectively, followed by South Korea (17.9%), Brazil (7.5%), South Africa (6.6%), and Mexico (3.9%).
Significant industry exposures included semiconductors & semiconductor equipment (12.5%), banks (12.2%), and technology hardware & equipment (12.1%) with lesser exposure to materials (9.2%), diversified financials (6.1%), and energy (4.5%).
Notable positions included Taiwan Semiconductor Manufacturing (8.8%), Samsung Electronics (5.8%), Reliance Industries (3.2%), and Infosys (2.4%).