Unpacking Your Portfolio’s Exposure to China
By Alejandro Saltiel, CFA
Head of Indexes, U.S.
When theMSCI Emerging Markets Index (MSCI EM)launched in January 2001, the market cap weight of the Chinese equity market was just above 6%.
Fast-forward two decades, and itsmarket cap weightis now equivalent to one-third of the emerging market (EM) equities.
MSCI EM Index – Exposure to China
As the Chinese market continues growing, investors with broad EM exposure have been left with a 33% position in a market that has an incredible amount of both headwinds and tailwinds, making it complicated to implement their specific asset allocation views.
WisdomTree is launching XCtheWisdomTree Emerging Markets ex-China Fundallowing investors to unpack the Chinese exposure in their EM position. Investors will now be able to combineXCwith other China-specific exposures like theWisdomTree China ex-State-Owned Enterprises Fund (CXSE)to scale their exposure to their desired asset allocation.
Methodology
TheWisdomTree Emerging Markets ex-China Fundwill track theWisdomTree Emerging Markets ex-China Index (WTEMXC), which rebalances on an annual basis and provides investors with exposure to non-state-owned companies (non-SOEs) in emerging market countries excluding China.
The investment thesis behind excludingstate-owned enterprises (SOEs)when investing in emerging markets is one thatweve written about in the past. Companies in which the local government has a significant ownership interest (defined as greater than 20%) have exhibited conflicts of interest in their management and tend to have lower profitability than their non-SOE peers. Excluding SOEs also tilts a portfolio toward higher growth sectors like Consumer Discretionary, Health Care and Communication Services, which reflect the current makeup of EM economies.
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