Here Are Ways to Gain Emerging Market Exposure While Sidestepping China Risk

It seems like if you looked up the phrase headline risk in the dictionary, you would see a picture of the trading calendar for 2022. China seems to be occupying a few positions in the top 10. From initial tacit approval of Russia's invasion of Ukraine to the country's implementation of its zero COVID policy and the effects of that policy on global manufacturing and trade, to longstanding labor and social issues, China grabs its share of disconcerting headlines. Specific risks to U.S. investors include the list of sanctioned Chinese companies issued in November 2020 and updated in June 2021 which made a number of Chinese companies off limits for U.S. investors. Another issue that was identified a while ago and was dragged into the spotlight was the discovery of the Luckin Coffee accounting fraud in 2020. One outcome of that case was the introduction of proposed rules that would require U.S.-listed Chinese companies to adhere to U.S. Generally Accepted Accounting Principles (US GAAP) in their filings. May 5, 2022, saw the U.S.-China Economic and Security Review Commission update its list of Chinese-domiciled U.S.-listed companies that would be slated to be delisted pending audit rule changes. In reviewing this list, I found that one of these companies, $4 billion HR services provider 51job Inc., was taken private the very next day. There are 248 companies on this list representing a little more than $750 billion of market capitalization as of May 13. Looking at companies that had $1 billion in market cap (50 names) at the end of 2021, I found that the weighted average return year to date through May 13 was -28.65%, the median return -26.36%, and the highest and lowest returning names were 96.78% (360 DigiTech ) and -94.50% (TAL Education Group ), respectively. While many of these risks are difficult to quantify, the effects of the zero COVID policy and the prospect of cutting off $750 billion in market cap from U.S. investors have had a clear effect on these names, prompting many investors to second guess their exposure to China. Push for Ex-China Even the issuer of China-centric emerging markets Internet & Ecommerce ETF recognized that some investors might be wary of continued exposure to China and issued the Next Frontier Internet + Ecommerce ETF . Using the term Frontier in the fund name, while undoubtedly referring to the New Frontier aspects of the Internet, might lead some investors to think that this fund is Frontier Market focused. From a country exposure perspective, FMQQ is essentially EMQQ ex-China and Hong Kong with the addition of some UK exposure. Both of these funds have had a rough year so far, down 35.06% (EMQQ) and 48.21% (FMQQ) as of May 16. This is attributable to the focus on technology and the Internet and is relatively in line with U.S. tech counterparts such as the Invesco QQQ Trust , which is down 24.89% over the same period. One fund that provides broad emerging market exposure that I've written about before -- and yes, I'm a shareholder -- is the Freedom 100 Emerging Markets ETF , which utilizes a proprietary data set to rate and rank EM countries based on overall freedoms that include Civil, Political and Economic freedoms. This broader EM exposure not only means it has outperformed both EMQQ and FMQQ but also QQQ and even the SPDR S&P 500 ETF , which is down 15.50% year to date through May 16, with FRDM down -10.14% over the period. It has been drummed into us that past returns are not indicative of future performance, and I wholeheartedly agree. That said, given the uncertainties surrounding China and developed markets as well, it seems to me that EM exposure that avoids China either for volatility's sake or ESG (environmental, social and governance) reasons makes sense to me. FRDM provides EM exposure that is not just a refuge from China but also all the other autocratic and, for lack of a better way to say it, unfree markets.

Here Are Ways to Gain Emerging Market Exposure While Sidestepping China Risk

If you'd prefer to avoid the headline risk that comes with investing in China, here are a couple ETFs to consider.

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