Emerging market investing has long been dominated by China’s outsized role. The country once accounted for roughly 30%-40% of many EM indexes. However, growing geopolitical tensions, regulatory uncertainties, and economic slowdowns have led many advisors and investors to reconsider their China exposure. This has sparked increased interest in “ex-China” emerging market strategies as a way to capture growth potential while mitigating China-specific risks.
And they aren’t alone. According to Morningstar Direct, European-listed EM equity ETFs took in €8.1 billion in net inflows in the first seven months of 2025, already ahead of 2024’s full-year total and on pace to break the record set in 2023. A notable share of those flows are targeting EM strategies that strip out China entirely.
Geopolitical & Regulatory Risks
Over the past few years, U.S./China relations have become increasingly strained, with trade disputes, technology restrictions, and concerns about Taiwan’s geopolitical status fueling investor caution. China’s domestic regulatory clampdowns, particularly in sectors like technology and education, have further increased market volatility. According to a 2025 report by Morningstar, such changes in China have contributed to notable fluctuations in its equity markets, leading investors to seek diversification outside of China’s influence.
Additionally, China’s economic growth is slowing due to demographic headwinds, debt concerns, and structural shifts toward a consumption-driven economy. The IMF’s World Economic Outlook in 2024 projects China’s GDP growth to moderate to around 4%-5% over the next few years, compared to double-digit growth in many other emerging economies. This slowdown reduces the growth premium that once made China the centerpiece of EM allocations.
What’s Left When You Remove China?
Removing China from the EM mix unveils a diverse landscape with compelling opportunities such as India, Brazil, Mexico, Southeast Asia (Indonesia and Vietnam), and South Korea, and Taiwan.
Morgan Stanley’s 2024 outlook highlights India as the fastest-growing major economy within EM, driven by consumption and technology sectors.
As a leading commodity exporter, Brazil stands to gain from the global energy transition and rising demand for agricultural products. Its relatively stable macroeconomic environment and ongoing reforms offer attractive long-term potential.
Close proximity and trade integration with the U.S. make Mexico a prime beneficiary of nearshoring trends, with growth in manufacturing and consumer markets.
Indonesia and Vietnam are emerging as key manufacturing hubs due to lower labor costs and favorable trade agreements, supported by youthful populations and urbanization trends.
While often debated as emerging or developed, South Korea and Taiwan remain central players in the global technology supply chain.
How Advisors Are Implementing Ex-China Strategies
Fund flow data from Morningstar (Q2 2025) indicates growing investor interest in EM ex-China funds, with inflows exceeding $2 billion year-to-date, signaling a shift in market sentiment.
Many advisors are now incorporating dedicated ex-China funds and ETFs to tailor client portfolios more precisely. One prominent option is the iShares MSCI Emerging Markets ex China ETF (EMXC ), which has $12.85 billion in assets under management, according to YCharts data.
Another alternative is the SPDR S&P Emerging Markets ex-China ETF (XCNY ). Unlike EMXC, which tracks an MSCI index, XCNY is designed to replicate the performance of the S&P Emerging Ex-China BMI — a broad-market index of companies in emerging economies, excluding China.
For investors seeking a more hands-on approach, the Global X Emerging Markets ex-China ETF (EMM ) offers active management. Instead of passively tracking an index, EMM’s managers actively select companies across emerging markets (excluding China) that they believe have the potential to become market leaders.
Active management is critical in these strategies, as EM countries can have varying risk profiles, liquidity considerations, and political climates. Advisors are combining ex-China exposure with sector and thematic tilts — such as consumer growth or green energy — to align with client goals.
Risks to Keep in Mind
While ex-China strategies reduce concentration risk, they come with their own challenges. For example, smaller markets tend to have lower liquidity, which can exacerbate price swings.
Emerging currencies can also be susceptible to fluctuations due to monetary policy changes and external shocks.
Excluding China can also increase reliance on a few large countries like India and Brazil, which still carry unique risks.
Tactical Hedge, or Structural Shift?
Is the move toward ex-China emerging markets a short-term hedge, or a long-term thematic change? Many advisors see it as both: a tactical response to near-term risks in China, and a recognition of the broader, diversified growth engines across emerging economies.
For investors seeking to balance growth and risk in their EM exposure, incorporating ex-China strategies offers a compelling way to navigate the evolving global landscape. As always, active management and ongoing risk- monitoring remain essential to unlocking value in this dynamic space.
Originally published on Advisor Perspectives
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