New ETF Takes Security Risks Out of Emerging Markets

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Investors to weed out national security threats from their portfolio while retaining exposure to emerging markets have a new purpose-built exchange-traded fund (ETF) to consider.

On December 7th, 2023 – the 82nd anniversary of Pearl Harbor – The National Security Emerging Markets Index ETF launched on the Nasdaq under the ricker “NSI.”

The fund is run by an independent, majority veteran-owned business, the National Security Index. Its managers include specialists from the worlds of finance and defense.

NSI aims to track the Alerian National Security Emerging Markets Index, which is run by VettaFi and is rebalanced semiannually. 

Its component companies are screened for at least one of nine investment metrics. Companies that test positive for any of the following are eliminated from the holdings. Broadly, this process

Filters out companies that are sanctioned by the U.S, supply equipment to countries of concern or hostile military groups, aid state-sponsored influence operations against the U.S. or its allies, violate human rights, or pose cybersecurity and/or espionage cybersecurity threats, among others.  

While the security screening eliminates many Chinese firms, others are still included in the fund, such as Meituan, China’s biggest delivery platform, and Netease, an online gaming, e-learning, and e-commerce conglomerate. Chinese companies have a lighter presence in NSI than broad MSCI-based emerging markets ETFs, yet they still make up roughly one-fifth of the holdings. 

Emerging market ETFs that exclude China have become popular this year, such as the Columbia EM Core Ex-China ETF (XCEM) and iShares Emerging Markets ex China ETF (EMXC) have become popular this year as investors and advisors seek ways to shield their portfolios from China risks. 

Chexit? 

International investors are retreating from China as hopes fade for the country’s long-awaited rebound. At the start of the year, many held high hopes China’s economy will roar back to life as Beijing abandoned its zero-Covid policies. Yet that bullish narrative has since given way to widespread skepticism over China’s long-term as the country grapples with a property crisis and sluggish growth. 

More than 75 percent of the foreign money that flowed into China’s stock market in the first seven months of the year has now exited the country. The outflow amounts to a sell off of more than $25 billion worth of Chinese stocks.  

“Japan’s on fire, India, Korea, Taiwan — that’s the problem,” one investment banker in Hong Kong told the Financial Times. “Right now the thinking is, ‘I don’t need to be in China, and if I am, it’s holding my portfolio back.’”

The banker said only strong upside long-term growth numbers can woo investors back to China. “If you can’t get that, investors won’t go there,” they added.

The outflow comes as the country’s economic outlook worsens. Just last month, Moody’s downgraded its outlook on China’s state debt from stable to negative. Beijing unsurprisingly challenged the credit agency’s rating, asserting that its economy is “highly resilient and has large potential.”

NSI carries an expense ratio of 75 basis points. 

This article was produced and syndicated by Wealth of Geeks

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