The FMQQ Next Frontier Internet & Ecommerce ESG-S UCITS ETF is a potentially preferable exchange-traded fund for investors wanting access to emerging markets but excluding China, according to HANetf.
As one of the world’s two biggest economies, accounting for 20% of global production, China has come to represent an ever-greater share of the MSCI Emerging Market Index, now over 30%, as well as around 35% of the FTSE Emerging index.
"We believe many investors are looking for exposure to a fund tracking one of these emerging market indices, but this highlights a potential problem; while some investors may be keen to gain such a high weighting towards China from these indices, for others this is less desirable," said HANetf, which runs the FMQQ ETF, as part of a 2022 thematic review.
There could be several potential reasons for this, it added, with some investors potentially fearing further regulatory crackdowns by Beijing as seen in the past year and a half, while for others it may be a matter of portfolio diversification.
Many investors have a high weighting towards China through its major companies being favoured by many actively managed funds in recent years, or may want access via a specialist China focused fund.
Akin to the UK being excluded from most European funds and Japan from most Asia-Pacific funds, there are funds that allow investors to "avoid doubling up on Chinese exposure", including indices such as MSCI Emerging Market Ex-China, which leaves the investor with around 24% in Taiwan, 19% in South Korea, 19% in India and 6% in Brazil.
However, this gives the investor heavy exposure to Taiwan Semiconductor Manufacturing (TSMC) at around 10% of the index, with Samsung the second largest holding at over 5%, and both companies with major exposure to North America and Europe.
"This matters for investors trying to tap into the emerging market growth story. When it comes to emerging markets, the rise of the consumer is arguably the real story. As developing economies become richer, citizens of these countries have more money for consumption," HANetf said.
Much of this theme, which McKinsey has called “the biggest growth opportunity in the history of capitalism”, is expected to come via e-commerce, the white label ETF issuer said.
"With this in mind, a potentially preferable index for emerging market without China is FMQQ Next Frontier Internet & Ecommerce Index.
"This index is the same as the Emerging Markets Internet & Ecommerce Index but with China stripped out. It follows the same rules for selecting companies and hence captures the same ecommerce growth, except that it excludes Chinese companies.
"In our view, it gives investors the flexibility to deal with their China allocation separately while also gaining exposure to the boom of ecommerce in emerging and frontier markets."