WisdomTree today announced the launch of its newest fund in NYSE, and WisdomTree Emerging Markets Outside China (XC) Fundfor investors interested in emerging market privatization, who wish to avoid government-owned companies, and who would like to control investments more targeting China through a supplemental fund.
“As Chinese market capitalization has ballooned over the past two decades, investors with extensive exposure to emerging markets now have nearly a third of their exposure in a market that experiences incredible headwinds and tailwinds, making executing certain assets a complexity. “We believe reasonable valuations and depressing sentiments are poised for a transition to a more emerging market environment by 2023,” Jeremy Schwartz, certified financial analyst and global chief financial officer at WisdomTree, said in the press release.
Disinvestment from China when acquiring EM allocations allows for a more diverse representation of EM countries while facilitating the opportunity for more deliberate and targeted investment in a potentially problematic country for some investors via a separate fund.
“Geopolitical uncertainty is very high – particularly with regard to China and US relations. Controlling China’s allocations with custom sleeves makes sense, and XC provides a fundamental approach focused on non-state-owned companies that give growth propensity to non-Chinese companies,” Schwartz said in a call with VettaFi.
XC is designed to complement both WisdomTree Former China State-Owned Enterprise Fund (CXSE) and the WisdomTree Emerging Markets Fund for Ex-State-Owned Enterprises (XSOE).
“This is a fantastic expansion for our former state-owned family that complements the China Dedicated Fund (CXSE) and the broader Emerging Markets Fund (XSOE),” Schwartz explained.
Outperforming non-state-owned companies
Government-owned companies tend to run their businesses with somewhat different priorities, geared more toward the broader focus of the government’s agenda rather than on what would be most beneficial and profitable for the individual company. This could have significant ramifications over a longer time horizon, as SOEs perform less than their non-SOE counterparts.
Image source: WisdomTree
According to WisdomTree research, the consolidated annual return of non-SOEs from December 31, 2007 through June 30, 2022 from within the MSCI Emerging Markets Index outside China is 2.03% compared to SOEs over the same period with a return of -0.28%.
NGOs are also increasing their representation in “new economy” sectors within emerging markets, including telecommunications services, consumer discretionary goods, consumer goods, healthcare, industries, and information technology, some of the most growth-oriented sectors. By comparison, SOEs tend to remain clustered in “old economy” sectors that focus on energy, finance, materials, real estate, and utilities. Investing in non-state-owned companies allows for greater acquisitions of growing and higher-return companies.
XC seeks to track the WisdomTree Emerging Markets Index outside of China, a market capitalization float-adjusted weighted index that excludes companies domiciled or established in China as well as companies with more than 20% government ownership, the criteria by which WisdomTree identifies a state-owned enterprise.
As of launch, the sector allocation for the fund was information technology at 29.35%, financials at 20.82%, materials at 9.42%, consumer discretion at 8.98%, basic consumer goods at 8.29%, and other sectors allocation at 5% or less.
The index also screens the ESG and excludes companies that violate global standards examination guidelines and the principles of the United Nations Global Compact as well as companies involved in the manufacture or distribution of basic weapons systems, or that have a significant role in the tobacco industry or in the thermal coal business.
“Unlike other emerging market ETFs that currently exclude Chinese companies, the new fund takes a pro-governance approach. XC is like some of the popular WisdomTree funds that screen state-owned companies from other major markets,” said Todd Rosenbluth, head of research at VettaFi. “.
XC has an expense ratio of 0.32%.
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