Investors holding traditional pure beta emerging markets exchange traded funds know that they’re heaping helpings of China exposure and comparatively small portions of exposure to other developing economies.
Obviously, that concentration risk is amplified when holding China-specific ETFs, but investors can offset some of that risk with funds such as the KraneShares MSCI Emerging Markets ex-China Index ETF (KEMX ). KEMX follows the MSCI Emerging Markets ex China Index, which can allocate to as many as 23 ex-China emerging markets.
While China is the world’s second-largest economy and a lynchpin in standard emerging markets ETFs, that doesn’t mean KEMX and its index lack for diversification.
“The MSCI Emerging Markets ex China Index captures large and mid cap representation across 23 of the 24 Emerging Markets (EM) countries* excluding China. With 663 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country,” according to MSCI.
KEMX could be a pertinent idea today for investors seeking international equity allocations due to the ETF’s exposure to high-quality, tech-haven markets such as Taiwan and South Korea. Those two countries, which are among the least volatile in the MSCI Emerging Markets universe, combine for over 40% of KEMX’s geographic exposure.
“Elsewhere, we’re also seeing an encouraging set of developments in the semiconductors and technology hardware cycles, which matter for the Korea and Taiwan markets. Although end use demand in most segments remained very weak in the first quarter, we believe our thesis that we are passing through the worst phase of the cycle was confirmed by positive stock price reactions to news of production cuts by industry leaders,” noted Jonathan Garner, Chief Asia and Emerging Market Equity Strategist at Morgan Stanley.
Another benefit of KEMX is that the KraneShares ETF devotes over 19% of its weight to India, an advantage of roughly 600 basis points relative to the MSCI Emerging Markets Index. That’s pertinent because India — Asia’s third-largest — has been home to some of the best-performing emerging markets equities since the start of 2022.
“Valuations adjusted meaningfully lower in that timeframe and we think Indian equities are now poised to join in the rally from here on an improving economic cycle outlook, as well as heightened structural interest in the market by overseas investors. India continues to benefit from ongoing positive household formation, industrialization and urbanization themes which are well represented in domestic equity benchmarks,” concluded Garner.
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