EMXC: Unattractive ETF Investing In Potentially High-Growth Segments

~ by Snehasish Chaudhuri, MBA (Finance).

iShares MSCI Emerging Markets ex China ETF (NASDAQ:EMXC) is an exchange-traded fund ("ETF") that invests in public equity markets of emerging economies. This fund has a diversified portfolio of large-cap stocks that benchmarks itself against the performance of the MSCI Emerging Markets ex China Index. The index is a free float-adjusted market capitalization-weighted index that mostly captures large-cap stocks across emerging markets economies, excluding China.

Almost 65 percent of EMXC's assets are invested in industrial, financial and information & communication technology sectors. The fund is currently priced at $50, trades almost around its net asset value, and has a low expense ratio of 0.25 percent. EMXC generated a low yield of a little over 2 percent and an extremely poor average total return over the past 23 quarters of its existence.

EMXC Primarily Invests in the Equity Markets of Taiwan, India, South Korea

The fund was launched by BlackRock, Inc. (BLK) during July, 2017, and it is managed by BlackRock Fund Advisors. Almost 60 percent of EMXC's assets are invested in three equity markets - Taiwan, India and South Korea. If we look across all the emerging markets, these three markets probably are best for investors. All these markets are witnessing significant growth, have a large pool of large-cap stocks in technology, industrial and financial sectors, have investment grade ratings in their sovereign bonds, and are geopolitically safe investments avenues. Most nations throughout the world have strong trade and political relations with these three countries. The portfolio tends to hold its investments for a longer period of time, as suggested by its low turnover ratio of 21 percent. EMXC also has a very high asset base of $3.5 billion.

EMXC Generated Low Yield and Extremely Poor Annual Average Total Return

iShares MSCI Emerging Markets ex China ETF was formed during July 2017 and has been paying semi-annual dividends since then. Average yield of 2022 was 2.4 percent. During the period between 2018 and 2022, EMXC generated an annual average yield of almost 2.25 percent. However, due to poor price performance, its total return became negligible. During the same 5-year period (2018 to 2022) EMXC annual average total return was less than even 1 percent.

A serious question arises here - how come the EMXC's total return is so poor despite the fund investing three-fifth of its assets in the equity markets of Taiwan, India, and South Korea, and again investing almost 65 percent of its total fund in potentially high-growth industries of ICT, industrial and financial.

EMXC's Investments in Taiwanese and South Korean Market Had Poor Growth

This fund's top investments from Taiwan and South Korea primarily belong to stock from those three sectors - ICT, financial and industrial. iShares MSCI Emerging Markets ex China ETF invested in 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 had posted negative price growth during the past 1 year, and only ASX was able to generate price growth in excess of 2.5 percent.

iShares MSCI Emerging Markets ex China ETF also invested in some stocks from those three industries that are only available to US investors in the form of ADRs, or are traded only in the 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 Solution Limited, and Cathay Financial Holding Co., Ltd. ADR (OTC:CHYYY), Kakao, Mega Financial Holding Co Ltd, CTBC Financial Holding Co Ltd, are few such examples in which the fund has made considerable investments.

EMXC's Investments in Equities of Indian Companies Also was Disappointing

When it comes to Indian companies, iShares MSCI Emerging Markets ex China ETF primarily invested in ICT powerhouses like Infosys Limited (INFY), Tata Consultancy Services, Ltd. ADR (OTCPK:TTNQY), HCL Technologies Ltd. ADR (OTCPK:HCTHY), Tech Mahindra Ltd. (OTC:TCHQY), WIPRO Limited (WIT), BHARTI AIRTEL LTD ADR (OTCPK:BHRQY), etc., and in 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 Limited, Hindustan Unilever Ltd, Larsen & Toubro Limited (OTC:LTOUF), ITC Ltd., Asian Paints Ltd., Maruti Suzuki India Ltd ADR (OTCPK:MRZUY), Mahindra & Mahindra Limited (OTCPK:MAHDY) and Sun Pharmaceuticals Industries Ltd. ADR (OTCPK:SMPQY) remains few other major equity investments of EMXC in the Indian market.

Equities of Indian companies have performed relatively better in their domestic markets, but again not particularly significantly. Moreover, investment in all these stocks were made mostly in ADRs. Overall, the price returns were nothing impressive. EMXC, too, had registered a price loss of almost 13 percent during the past 1 year. This fund had a strong recovery post the COVID-19 pandemic, as its market price almost doubled within less than 15 months from the pandemic related market shock during March, 2020. The price then stayed at the same level for almost a year. However, in February 2022, the price started dropping and suffered significant loss during most of 2022. Overall, the return has been volatile for investors. On top of this, the economic, geopolitical, and fiscal situation of emerging markets are adding further pain to investors of iShares MSCI Emerging Markets ex China ETF.

Despite High Growth Potential EM Markets are Yet to Overcome Challenges

Since the last quarter of 2022, global economies are generating enthusiasm. As the fund does not invest in Chinese markets, the covid-19 restrictions and export loss of Chinese large-caps, were anyways not impacting this fund. Nevertheless, the reopening of the Chinese economy will enhance the demand in the Asia-pacific region. However, similar trends need to be reciprocated in the developed markets, too. Producers nevertheless are still cautious about the growth outlook, and are focusing on employment control and inventory reduction policies. This reassigns the fact that the business environment still remains challenging and resumption of robust growth remains doubtful.

Investment Thesis

According to my "7 Factor Model for Evaluating Global Equity Funds," iShares MSCI Emerging Markets ex China ETF is no way an attractive investment option. It only qualifies for the minimum requirements with respect to assets under management, or AUM, of $200 million, the stock price of more than $5, and by being adequately diversified among all the major segments of the economy. The fund also has a low expense ratio and turnover ratio. However, the fund failed miserably in other areas. The fund consistently generated a yield of less than 3 percent, and its total return was extremely poor. Although negligible, the fund is currently trading at a premium.

Top investment in potentially high-growth sectors (ICT, financial and industrial) from all the three targeted equity markets of Taiwan, India and South Korea had a disappointing price performance during the past one year. Investments in emerging markets attract much higher risk than the developed markets. Overall, EMXC's returns have been volatile. On top of that, the economic, geopolitical, and fiscal situation of emerging markets are adding further pain to investors of iShares MSCI Emerging Markets ex China ETF.

iShares MSCI Emerging Markets ex China ETF seems to be in position to sustain its current yield and total returns. However, this unfortunately will neither fulfill requirements of income-seeking investors nor that of growth-seeking investors.

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