Two huge emerging market ETFs to diverge on China exposure

The two leading exchange-traded funds focusing on emerging markets have very different exposure to now-vulnerable Chinese stocks and will probably diverge further, a new analysis by S&P Capital IQ shows.

The Vanguard FTSE Emerging Markets Stock Index ETF recently had 28 per cent of its assets invested in China, while BlackRock's iShares MSCI Emerging Markets ETF had 24 per cent, even though both are index-following broad emerging markets funds.

Chinese stocks have fallen sharply from the highs reached in June, and further weakness in the market and the country's economy could play out very differently in these two funds.

"Based on the names and country profiles, it should seem they are offering you the same exposure, but they track different indices," said Todd Rosenbluth, a director of ETF and mutual fund research at S&P Capital. "Their country exposure is going to be different, and that exposure difference helps explain why they perform differently."

So far, the discrepancy had helped the Vanguard fund, Rosenbluth said, although both funds had taken a hit since the end of June.

Chinese shares have been falling on fears the country's economy may slow well beyond the 7 per cent growth rate that analysts had earlier suggested would be a bottom for that market.