The price of missing the China rally

The recent unleashing of Chinese monetary stimulus has done huge favours for a stock market that has proved pretty dicey in recent years, and the knock-on effect for funds is pretty apparent. 

To take a name from our Top 50 ETFs list, the Franklin FTSE China ETF (FRCH) is up by nearly a quarter for 2024 so far, despite having in recent days given up some of the huge gains made on the news of the stimulus in early October. Elsewhere, a popular China play that has struggled in recent years, the KraneShares CSI China Internet ETF (KWBP), is up by even more.

Investors taking a broader form of exposure via the likes of the iShares Core MSCI Emerging Markets IMI ETF (EMIM) have also felt the benefits, making a return of 12.3 per cent in sterling terms.

But investors have grown increasingly wary of exposure to China in recent years, triggering the launch of some emerging market funds that explicitly avoid investing in the country. If China is on the rise once again, how much performance have they sacrificed?

As with many of the US-light global funds we discuss in this week's feature, the answer is that they have underperformed the conventional index yet have still done pretty well. The iShares MSCI EM ex-China ETF (EXCS) which also sits in our top 50 has returned 9 per cent so far this year.

That ETF also looks pretty solid over three years to the middle of October, having returned 12.9 per cent versus just 5 per cent for the conventional emerging markets ETF (EMIM) mentioned earlier. Investors face the question of whether to take the China risk, or perhaps to hold such funds together in an attempt to find some diversification.

Such products have come about not just because China has had such a rocky ride, but also because it has a dominant presence in emerging market and Asia indices.

On a related note, we should remember that any fund excluding a major component of an index can embrace other forms of concentration: the ex-China ETF has about a quarter of its assets apiece in India and Taiwan, with a decent slug of money in South Korea, too.

It's not just in Asia that fund providers have looked to skirt concentration issues. It's hard to ignore the dominance of a few large-cap stocks in the US, and that has led many investors to use equal weight S&P 500 ETFs. As the name suggests, these funds give a roughly equal weight to every constituent of the index, diminishing the impact of big names with big momentum, be it Nvidia (US:NVDA) on the rise or Tesla (US:TSLA) on the way down.

One example here, the iShares S&P 500 Equal Weight ETF (EWSP), has critics who argue that it misses the upside generated by the large-cap stocks but would still suffer in a broad sell-off.

But it hasn't done so badly this year, generating a sterling total return of around 13 per cent and performing particularly well in recent months. That compares with 21.2 per cent from stablemate the iShares Core S&P 500 ETF (CSP1). And it's worth noting that the equal weight ETF lost 0.7 per cent in a difficult 2022, a much less painful result than the 7.9 per cent loss for CSP1.