3 Emerging Markets ETFs to Buy if You Want to Steer Clear of China


  • If you’re looking for emerging market ETFs, you don’t have to buy from China. 
  • iShares MSCI Poland ETF (EPOL): Another 50% return could be in the cards. 
  • Global X MSCI Colombia ETF (GXG): Colombia’s economy is surprisingly strong right now.
  • Franklin FTSE South Africa ETF (FLZA): If Africa’s your jam, FLZA is an inexpensive way to play the continent. 
Emerging Markets ETFs - 3 Emerging Markets ETFs to Buy if You Want to Steer Clear of China

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Are you looking for emerging markets ETFs to buy? For starters, Chinese stocks are on fire.

The Hang Seng Index is up 35% in the past three months through Jan. 20. The MSCI China Index has gained 36%. Investors who’ve been avoiding China are probably having a change of heart given the latest action.

Analysts at several Wall Street firms believe Chinese stocks will continue to do well over the next few months. There are several reasons for this, including an end to zero-Covid restrictions and the Chinese government’s relaxing its attack on tech companies.

However, the fact that China’s economy relies on exports does not bode well should there be a global slowdown. So there’s an argument for and against leaning into Chinese stocks.

For those who would rather avoid China, here are three emerging markets ETFs to buy investing in companies outside the world’s second-largest economy.

iShares MSCI Poland ETF (EPOL)

Poland Flag in Blue Sky and the centre of Warsaw in background. EPOL stock
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The iShares MSCI Poland ETF (NYSEARCA:EPOL) is the largest of these three emerging markets ETFs, with $216 million in net assets. The ETF tracks the performance of the MSCI Poland IMI 25/50 Index.

IMI stands for “Investable Market Index.” These cover market caps of all sizes. The 25 refers to the maximum weight the index may give any stock. The 50 refers to the fact the index can’t have more than 50% represented by stocks with a weighting of 5% or more. For example, if four stocks each had a weighting of 12.5%, a fifth stock couldn’t be weighted more than 5% because it had already reached its 50% ceiling.

EPOL invests in Polish stocks of all sizes. The current 34 holdings are rebalanced quarterly and reviewed annually. The ETF has a three-month total return of 50.9%, almost 6x the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).

The ETF charges 0.58%, which isn’t too bad for a country fund like Poland. Its top 10 holdings account for nearly 68% of its net assets. The top two stocks: Polski Koncern Naftowy Orlen (OTCMKTS:PSKOF) and Powszechna Kasa Oszczednosci Bank (OTCMKTS:PSZKY), account for 27% of its holdings. 

Like many market cap-weighted ETFs in the U.S., a bet on EPOL, to a certain extent, is a bet on these two companies.

As they say, a ball in motion tends to stay in motion. So ride EPOL until it’s clear its momentum has ended.

Global X MSCI Colombia ETF (GXG)

The view from the top of Piedra El Penol in Guatape Columbia. GXG stock
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Global X MSCI Colombia ETF (NYSEARCA:GXG) is the second-largest, by net assets, ETF on this list. It has $25.5 million invested in 22 Colombian companies, providing investors with targeted exposure to the Colombian economy.

The ETF tracks the performance of the MSCI All Colombia Select 25/50 Index. The stocks included in the index are companies based or listed in Colombia, carrying out most of their operations in Colombia, or in some other way considered a Colombian business.

You’ll notice that it has the same 25 and 50 restrictions as the Polish ETF. That’s to ensure that the index isn’t overly reliant on one company for its performance. The top 10 holdings account for 70% of the ETF’s net assets. In addition, GXG has a 50% turnover rate, which means the average stock remains in the portfolio for two years.

As Global X’s marketing material states, Columbia’s gross domestic product (GDP) grew by more than 7% in 2022. It’s expected to grow by at least 2% annually through 2027. For perspective, the Conference Board projects that the U.S. GDP will increase by 2.0% in 2022, slow to 0.2% in 2023, and increase to 1.7% in 2024.

Therefore, for now, the Colombian economy appears to be a better bet. Charging 0.61%, it’s an easy way to bet on a relatively more robust economy.

Franklin FTSE South Africa ETF (FLZA)

Waterfront of Cape Town with Chalkboard in the background, South Africa
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The Franklin FTSE South Africa ETF (NYSEARCA:FLZA) is the smallest of the three emerging markets ETFs discussed by net assets with just $3.6 million. In existence since October 2018, it’s also the cheapest, charging just 0.19%.

As Franklin Templeton suggests, the fund “[p]rovides access to the South African stock market, allowing investors to precisely gain exposure to South Africa at a low cost.”

The ETF tracks the performance of the FTSE/JSE South Africa Capped Index. The “capped” reference implies that it, too, uses a 25/50 approach. The ETFs top 10 holdings account for 55% of its net assets. Its turnover is a low 13%, which means some of the stocks held have been in the portfolio for more than seven years. As a result, fewer trades means lower fees.

For $1.90 in fees per $1,000 invested, a buyer of FLZA gains exposure to 54 South African companies. The top three sectors by weighting are financials (30.5%), materials (23.9%), and consumer discretionary (20.0%). The weighted average market cap of the 54 holdings is $14.3 billion, making it a mid to large-cap allocation.

Performance-wise, FLZA had a total return of 26.6% over the past three months, almost 10% of it coming in the past month. Up 8.2% year-to-date, 2023 looks like it will rebound from a 5.1% decline in 2022.

If you’re hesitant because of the low net assets, you could always look at the iShares MSCI South Africa ETF (NYSEARCA:EZA). It has $431.5 million in net assets. However, it charges 0.58%.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Article printed from InvestorPlace Media, https://investorplace.com/2023/01/3-emerging-markets-etfs-to-buy-if-you-want-to-steer-clear-of-china/.

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