Vanguard is diving into one of the most politically charged corners of the ETF world with the filing of a new fund that will offer exposure to emerging markets—excluding China.
According to a preliminary prospectus filed with the SEC on May 30, the Vanguard Emerging Markets ex-China ETF will track the FTSE Emerging ex-China Index, an index that omits China while maintaining broad exposure to the rest of the developing world.
It’s an intriguing move, especially given the current geopolitical backdrop. U.S.-China relations are as strained as they’ve ever been. President Donald Trump recently imposed tariffs on Chinese goods that exceeded 100% before scaling them back temporarily. But even without the tariff drama, concerns about China’s market environment have been mounting.
Investors have grown increasingly wary of the Chinese government’s interventions in its domestic economy, crackdowns on high-profile companies, threats of delisting Chinese firms from U.S. politicians and the ever-present risk of conflict over Taiwan.
Add in demographic headwinds and disappointing economic growth, and it’s no wonder Chinese equities have weighed on sentiment toward the broader emerging markets category.
That’s taken a toll on traditional emerging markets ETFs. The two largest funds in the category—the iShares Core MSCI Emerging Markets ETF (IEMG) and the Vanguard FTSE Emerging Markets ETF (VWO)—have $88 billion and $86 billion in assets, respectively, but both have significant exposure to China and Taiwan. IEMG allocates 26% to China and 18% to Taiwan; VWO has 32% in China and 18% in Taiwan.
Over the past five years, IEMG and VWO have returned 41% and 43%, respectively, lagging the 61% return of the Vanguard Total International Stock ETF (VXUS) during the same period.
As a result, more investors have turned to emerging markets strategies that exclude China altogether. The iShares MSCI Emerging Markets ex China ETF (EMXC), which launched in 2017, had just $3 billion in assets at the start of 2023. Today, it boasts $14 billion.
Performance for EMXC has been mixed relative to its full-market counterparts. Over the past five years, it’s returned 58%—solidly ahead of VWO and IEMG. But since its inception in July 2017, EMXC is up 39%, similar to VWO at 40% and only modestly better than IEMG's 34%.
Still, that hasn’t stopped investors from pouring into the strategy. And now, Vanguard is ready to tap into that demand, while undercutting its competition. The new ETF will charge just 0.07%, well below EMXC’s 0.25% fee.
