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~ by Snehasish Chaudhuri, MBA (Finance).
iShares MSCI Emerging Markets ex-China ETF (NASDAQ: EMXC) is an exchange-traded fund (“ETF”) that invests in the public equity markets of emerging economies. The fund has a diversified portfolio of large-cap stocks which is benchmarked against the performance of the MSCI Emerging Markets x China Index. The index is a free float-adjusted market capitalization-weighted index that captures large-cap stocks in mostly emerging market economies, excluding China.
About 65 percent of EMXC’s assets are invested in the industrial, financial and information and communication technology sectors. The fund is currently priced at $50, trading around its net asset value and has a low expense ratio of 0.25 percent. EMXC has produced a low yield of just over 2 percent and a very weak average total return over the past 23 quarters of its existence.
EMXC primarily invests in the equity markets of Taiwan, India, South Korea
During July, 2017 BlackRock, Inc. (BLK) The fund was launched and is managed by BlackRock Fund Advisors. About 60 percent of EMXC’s assets are invested in three equity markets – Taiwan, India and South Korea. If we look across all emerging markets, these three markets are probably the best for investors. All these markets are witnessing significant growth, have a large pool of large-cap stocks in the technology, industrials and financials sectors, have investment grade ratings on their sovereign bonds and are geopolitically safe investment avenues. Most of the countries of the world have strong trade and political relations with these three countries. The portfolio tends to hold its investments for a long time, as suggested by the low turnover ratio of 21 percent. EMXC also has a very high asset base of $3.5 billion.
EMXC generates low yields and very poor average annual total returns
The iShares MSCI Emerging Markets ex China ETF was formed in July 2017 and has been paying semi-annual dividends since then. The average yield in 2022 was 2.4 percent Between 2018 and 2022, EMXC generated an annual average yield of about 2.25 percent. However, due to poor price performance, its total return has become negligible. Over the same 5-year period (2018 to 2022), EMXC’s annual average total return was less than 1 percent.
A serious question arises here – how is EMXC’s total return so poor despite the fund investing three-fifths of its assets in the equity markets of Taiwan, India and South Korea, and potentially nearly 65 percent of its total funds? ICT, industrial and financial high-growth industries.
EMXC’s investments in the Taiwanese and South Korean markets showed poor growth
The fund’s top investments from Taiwan and South Korea primarily belong to stocks in these three sectors – ICT, financials and industrials. iShares MSCI Emerging Markets Ex China ETF Taiwan Semiconductor Manufacturing Company Limited (TSM), Chunghwa Telecom Co., Ltd. (CHT), United Microelectronics Corporation (UMC), NAVER Corporation (OTCPK:NHNCF), KB Financial Group Inc. (KB), Fubon Financial Holding Co., Ltd (OTCPK:FUIZF), Shinhan Financial Group Co., Ltd. (SHG), and ASE Technology Holding Co., Ltd (ASX). Most of these stocks have posted negative price growth over the past 1 year, and only the ASX has managed to increase in value by more than 2.5 percent.
The iShares MSCI Emerging Markets ex China ETF also invests in certain stocks in those three industries that are only available to US investors in ADR form, or are traded only on local exchanges. Samsung Electronics Co., Ltd. ADR (OTCPK:SSNLF), Hon Hai Precision Industry Co., Ltd. ADR (OTCPK:HNHAF), MediaTek Inc. ADR (OTCPK:MDTKF), SK Hynix, Inc. ADR (OTC:HXSCL) ), Delta Electronics, Inc. ADR (OTC:DLELY), Samsung SDI Co. Ltd. ADR (OTCPK:SSDIY), LG Chemical Co., Ltd. ADR (OTCPK:LGCLF), LG Energy Solutions Ltd., and Cathay Financial Holding Co., Ltd. ADR (OTC:CHYYY), Kakao, Mega Financial Holding Co Ltd, CTBC Financial Holding Co Ltd are some examples where the fund has made substantial investments.
EMXC’s investments in Indian company equities have also been disappointing
When it comes to Indian companies, the iShares MSCI Emerging Markets ex China ETF primarily holds Infosys Limited (INFY), Tata Consultancy Services, Ltd. ADR (OTCPK:TTNQY), HCL Technologies Ltd. ADR (OTCPK:HCTHY), has invested in ICT powerhouses like Tech Mahindra Limited (OTC:TCHQY), WIPRO Limited (WIT), BHARTI AIRTEL LTD ADR (OTCPK:BHRQY), etc., and financial giants like HDFC Bank Limited (HDB), ICICI Bank Limited (IBN), Axis Bank Ltd, Bajaj Finance Limited, Kotak Mahindra Bank Limited, and State Bank of India ADR (OTCPK:SBKJY). Reliance Industries Ltd., Hindustan Unilever Ltd., Larsen & Toubro Ltd. (OTC:LTOUF), ITC Ltd., Asian Paints Ltd., Maruti Suzuki India Ltd. ADR (OTCPK:MRZUY), Mahindra & Mahindra Limited (OTCPK:MAHDY) and Sun Pharmaceuticals Industries Limited ADR (OTCPK:SMPQY) remain some of EMXC’s other large equity investments in the Indian market.
Equities of Indian companies have performed relatively well in their domestic markets, but again not particularly significantly. Moreover, investments in all these stocks were mostly made in ADRs. Overall, the price return was nothing impressive. EMXCO, has registered a price decline of around 13 percent in the last 1 year. The fund had a strong recovery after the COVID-19 pandemic, as its market value nearly doubled in less than 15 months since the pandemic-related market shock in March, 2020. Then the price remained at the same level for almost a year. However, in February 2022, prices began to decline and suffered significant losses for most of 2022. Overall, returns for investors were volatile. On top of that, the economic, geopolitical and financial conditions in emerging markets are adding more pain for investors in the iShares MSCI Emerging Markets ex China ETF.
Despite high growth potential, EM markets are yet to overcome challenges
From the last quarter of 2022, global economies are building momentum. As the fund does not invest in the Chinese market, the Covid-19 restrictions and export losses in Chinese large-caps, however, have not affected the fund. Still, the reopening of the Chinese economy will boost demand in the Asia-Pacific region. However, similar trends need to be reflected in developed markets as well. Yet producers are still cautious about the growth outlook, and are focusing on employment control and inventory reduction policies. This re-allocates the fact that the business environment still remains challenging and a strong growth recovery remains doubtful.
Investment Thesis
According to my “7 Factor Model for Valuing Global Equity Funds”, the iShares MSCI Emerging Markets ex China ETF is by no means an attractive investment option. It only qualifies for the minimum requirements by having assets under management, or AUM, of $200 million, a stock price of more than $5, and being sufficiently diversified across all major segments of the economy. The fund has a low expense ratio and turnover ratio. However, the fund has failed miserably in other areas. The fund has consistently generated returns of less than 3 percent and its total returns have been abysmal. Although insignificant, the fund is currently trading at a premium.
Top investments in potentially high-growth sectors (ICT, financials and industrials) from the three targeted equity markets of Taiwan, India and South Korea had disappointing price performance over the past year. Investments in emerging markets attract much more risk than in developed markets. Overall, EMXC’s returns have been volatile. On top of that, the economic, geopolitical and fiscal conditions in emerging markets are adding more pain for investors in the iShares MSCI Emerging Markets ex China ETF.
The iShares MSCI Emerging Markets ex China ETF appears poised to maintain its current yield and total return. However, unfortunately it will not meet the needs of income-seeking investors or growth-seeking investors.