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ETF Wrap: As Russia’s Ukraine invasion roils global stock markets, is China the next big worry for ETF investors?

Russia’s invasion of Ukraine is entering its third week and many of the equity indexes covering investments in Moscow are closed indefinitely. The Wall Street Journal reported that MSCI Inc.
MSCI,
-4.64%

and other index providers removed Russian stocks from their global benchmarks this week, following sanctions imposed by the U.S. and other nations in response to the Kremlin’s offensive in Eastern Europe.

Exchange-traded fund behemoths, the iShares Core MSCI Emerging Markets ETF
IEMG,
-2.24%

and iShares MSCI Emerging Markets ETF
EEM,
-2.34%

removed all Russian stocks from their funds effective on Wednesday.

But is there another even bigger concern, lurking out there for 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 the Freedom 100 Emerging Markets ETF, 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.

The good

Best Performers

%Performance

Aberdeen Standard Physical Palladium
PALL,
-1.41%

18.2

VanEck Oil Services ETF
OIH,
+2.88%

15.2

U.S. Oil Fund LP
USO,
-1.96%

13.3

First Trust Global Tactical Commodity Strategy Fund
FTGC,
+1.17%

11.9

iShares GSCI Commodity Strategy Fund
COMT,
-2.30%

11.9

…and the bad

Worst Performers

ARK Fintech Innovation ETF
ARKF,
-4.90%

-17.0

KraneShares CSI China Internet ETF
KWEB,
-10.12%

-14.7

U.S. Global Jets ETF
JETS,
-1.39%

-14.6

ARK Next Generation Internet ETF
ARKW,
-5.37%

-14.2

ARK Innovation ETF
ARKK,
-5.04%

-13.2

Top inflows

SPDR S&P 500 ETF Trust
SPY,
-1.29%

Invesco QQQ Trust
QQQ,
-2.14%

SPDR Gold Shares
GLD,
+0.47%

iShares 7-10 Year Treasury Bond ETF
IEF,
-0.59%

Vanguard Total Stock Market ETF
VTI,
-1.30%

…outflows

Weekly outflows

iShares iBoxx $ Investment Grade Corporate Bond ETF
LQD,
-1.29%

Financial Select Sector SPDR Fund
XLF,
-1.54%

iShares U.S. Real Estate ETF
IYR,
-0.61%

Invesco KBW Bank ETF
KBWB,
-2.00%

iShares iBoxx $ High Yield Corporate Bond ETF
HYG,
-0.89%

China risk

Earlier this week, MarketWatch’s sister publication, Investor’s Business Daily, wrote that investors rocked by developments in Russia, with an almost daily stream of Western companies suspending activity from the country, shouldn’t forget China. “Nearly 15 major companies in the S&P 500, including information technology
firm Texas Instruments
TXN,
-1.32%

and Applied Materials
AMAT,
-3.67%

plus Tesla
TSLA,
-5.45%
,
report getting a quarter or more of their revenue from China,” wrote IBD.

And China’s ties to Russia may present itself as a possible issue for investors buying China-related assets or who have exposures to funds linked to Beijing. IBD noted that ETF exposure to China is in “orders of magnitude greater than
Russia ever was.”

For example, China accounts for around 33% of the aforementioned iShares MSCI Emerging Markets ETF, which boasts $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 the concern with China?

 China is in league with Russia, the New York Times wrote on Tuesday: China and Russia share some major interests. “They both would like American influence to wane, so that they have a freer hand to dominate their regions and exert global influence. These shared interests help explain why Xi Jinping and Putin released a joint statement last month, professing their countries’ friendship and harshly criticizing the U.S.”

China could be the next shoe to drop if its relationship with Russia deepens, as the conflict in Europe heats up. Geopolitical scholars are also closely watching China’s own dealings with Taiwan, a country that President Xi would ideally want to bring back into the family fold, which itself could spark a global outcry similar to what has been observed in the fallout of Russia’s attacks on Kyiv.

A popular way to get exposure to China stocks, KraneShares CSI China Internet ETF was down 9.5% for the week, at last check midday Thursday, off 26% in the year to date and 67% over the past 12 months, FactSet data show.

The iShares MSCI China ETF
MCHI,
-4.82%

is down 7.5% on the week, 18% thus far in 2022 and 38% over the past 12 months, while the iShares China Large-Cap ETF
FXI,
-4.62%

is off a similar degree for the week and looking at 17% year-to-date decline and a 36% slide over the past year.

CFRA analyst Todd Rosenbluth said diversification in investing is always key and notes that while China has its risks, it isn’t currently as unstable as Russia as an investment destination.

“While not a democracy, China’s geopolitical risks are much different than Russia’s,” he told ETF Wrap.

An anti-autocrat ETF?

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

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

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

“We are here to alleviate that heavy autocracy concentration,” in emerging markets investing, which can weigh down performance, Tolle said.

Tolle’s Freedom 100 Emerging Markets ETF, which has only about $124 million in assets, has outperformed peers significantly. Comparatively, Freedom is down 1.1% on the week, off 2.9% on the year to date and 3.5% over the past 12 months, while the larger EEM, referring to the iShares ETF, is down 2.8% for the week, 11.2% on the year and 19% over the past 12 months, and the performance is similar for IEMG and the Vanguard FTSE Emerging Market ETF
VWO,
-2.00%
.

FactSet

Amazon’s split

What impact if any will Amazon.com’s
AMZN,
+4.68%

impending split have on ETFs? Amazon.com Inc. announced on Wednesday that it was going to split its stock 20-to-1, contingent on a shareholder vote at its annual meeting on May 25. It is the first time in more than 20 years that it has split its shares, and during that period its shares have gained more than 4,500%.

CFRA’s Rosenbluth said that the split sets up Amazon as a potential candidate for inclusion in the price-weighted Dow Jones Industrial Average
DJIA,
-1.04%
,
which is tracked by the popular SPDR Dow Jones Industrial Average ETF Trust
DIA,
-1.06%
.
He said that even though there is considerably more combined money invested in S&P 500 index
SPX,
-1.26%

based ETFs, such as the SPDR S&P 500 ETF Trust, the iShares Core S&P 500 ETF
IVV,
-1.29%
,
the Vanguard S&P 500 ETF
VOO,
-1.27%

and the SPDR Portfolio S&P 500 ETF
SPYG,
-1.75%
,
“DIA investors have missed out on growth from the retail heavyweight AMZN for many years,” he said.

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