As Russia’s invasion of Ukraine shakes up global equity markets, is China the next big concern for ETF investors?

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Russia’s invasion of Ukraine is entering its third week and many stock market indices covering investments in Moscow are closed indefinitely. The Wall Street Journal reported that MSCI Inc. MSCI,
-4.69%
and other index providers removed Russian stocks from their global benchmarks this week, following sanctions imposed by the United States and other countries in response to the Kremlin’s offensive in Eastern Europe. ‘Is.

Exchange-traded fund giants iShares Core MSCI Emerging Markets IEMG ETF,
-1.74%
and iShares MSCI Emerging Markets ETF EEM,
-1.87%
removed all Russian stocks from their funds effective Wednesday.

But is there another, even greater concern, looming over emerging market investors as the geopolitical situation in Ukraine unfolds? Some experts are pointing to China as a potential problem, and we spoke to Perth Tolle, founder of ETF Freedom 100 Emerging Markets, to talk strategy.

Send tips or feedback, and find me on Twitter at @mdecambre or LinkedIn to tell us what you think are important topics for ETF Wrap.

Good
…and evil
Main contributions
…outputs
China risk

Earlier this week, MarketWatch’s sister publication Investor’s Business Daily wrote that investors shaken by developments in Russia, with an almost daily stream of Western companies suspending operations in the country, shouldn’t forget about China. “Nearly 15 major S&P 500 companies, including information technology
Texas Instruments TXN,
+0.17%
and Applied Materials AMAT,
-2.84%
more Tesla TSLA,
-2.41%,
report deriving a quarter or more of their income from China,” IBD wrote.

And China’s ties to Russia may pose a potential problem for investors buying China-related assets or exposed to Beijing-related funds. IBD noted that ETF exposure to China is “orders of magnitude greater than
Russia always has been.

For example, China accounts for around 33% of the aforementioned iShares MSCI Emerging Markets ETF, which has $26 billion in assets, while the iShares Core MSCI Emerging Markets, with $68 billion in assets, holds 31% of its assets linked to mainland China.

What’s wrong with China?

China is in cahoots with Russia, the New York Times wrote on Tuesday: China and Russia share major interests. “They would both like to see American influence diminished, so they would have more freedom to dominate their regions and wield global influence. These shared interests help explain why Xi Jinping and Putin issued a joint statement last month, professing their countries’ friendship and harshly criticizing the United States.

China could be the next shoe to drop if its relationship with Russia deepens as the conflict in Europe escalates. Geopolitical scholars are also keeping a close eye on China’s relationship with Taiwan, a country that President Xi would ideally like to bring back into the family fold, which itself could trigger a global outcry similar to what was seen during the fallout from the Russian attacks on Kiev.

A popular way to gain exposure to Chinese equities, KraneShares CSI China Internet ETF was down 9.5% for the week, when last checked at midday Thursday, down 26% year-to-date and 67% over the past 12 months, according to FactSet data.

The iShares MSCI China MCHI ETF,
-4.39%
is down 7.5% over the week, 18% so far in 2022 and 38% over the past 12 months, while the iShares China Large-Cap FXI ETF,
-4.53%
is at a similar degree for the week and is looking at a 17% year-to-date decline and a 36% decline over the past year.

CFRA analyst Todd Rosenbluth said investment diversification is still key and notes that while China has its risks, it is currently not as unstable as Russia as an investment destination.

“Although it is not a democracy, China’s geopolitical risks are very different from Russia’s,” he said. ETF envelope.

An anti-autocratic ETF?

We caught up with Tolle on Monday and discussed developments in Russia and the implications for the ETF market.

She said there are ways for investors to minimize the risks of investing in regions or countries that could be destabilized by autocratic leadership. Tolle offers a new approach to quantify the impact of freedom on investments. In 2019, Tolle founded Life + Liberty Indexes and launched an exchange-traded fund to give anyone access to his strategy.

His fund was one of the few that already excluded Russia before the Ukraine crisis and it is the one that excludes China, on the grounds that it has a low freedom ranking.

“We’re here to mitigate this high concentration of autocracy” in emerging market investments that can weigh on performance, Tolle said.

Tolle’s Freedom 100 Emerging Markets ETF, which has only about $124 million in assets, has significantly outperformed its peers. Comparatively, Freedom is down 1.1% on the week, 2.9% on the year to date and 3.5% on the last 12 months, while the larger EEM, referring to the ETF iShares, is down 2.8% on the week, 11.2% on the year and 19% on the last 12 months, and the performance is similar for IEMG and the Vanguard FTSE Emerging Market ETF VWO,
-1.54%.

set of facts


Amazon’s split

What impact, if any, Amazon.com’s AMZN,
+5.41%
Imminent ETF split? Amazon.com Inc. announced Wednesday that it will split its shares 20-to-1, subject to a shareholder vote at its annual meeting on May 25. This is the first time in more than 20 years that it has split its stock, and during that time its shares have gained more than 4,500%.

CFRA’s Rosenbluth said the split makes Amazon a potential candidate for inclusion in the price-weighted Dow Jones Industrial Average DJIA,
-0.34%,
which is tracked by the popular SPDR Dow Jones Industrial Average ETF Trust DIA,
-0.39%.
He said that even though there is a lot more combined money invested in the S&P 500 SPX index,
-0.43%
based ETFs, such as SPDR S&P 500 ETF Trust, iShares Core S&P 500 ETF IVV,
-0.46%,
the Vanguard S&P 500 ETF VOO,
-0.45%
and the SPDR S&P 500 ETF SPYG portfolio,
-0.75%,
“DIA investors have been missing out on the growth of retail heavyweight AMZN for many years,” he said.

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