China's plan to assert its dominance globally is costing U.S. investors big money. And you might be more exposed to China stocks than you think.
Political tension is heating up following Xi Jinping's confirmation this month for another term as president. Investors fret that party politics in China will trump globalization and economic growth. And that's bad news for investors.
Shares of all 10 of the largest China ETFs are down this year — by large amounts. This year, the ETFs — including iShares MSCI China, KraneShares CSI China Internet and iShares China Large-Cap — are off this year an average of 43%. That's more than twice the 18.5% decline of the S&P 500 during the same period.
Finding Your China Risk
An increasing divide between the U.S. and China is prompting some investors to rethink their approach. And given the importance of the region, some are finding they're more exposed than they might think.
Even many top emerging-market ETFs, a staple in most diversified portfolios, hold sizable amounts of Chinese stocks.
"Vanguard FTSE Emerging Markets, iShares Core MSCI Emerging Markets ETF, and iShares MSCI Emerging Markets ETF have between 25% and 33% of recent assets invested in Chinese companies," said Todd Rosenbluth, head of research at VettaFi. "So investors are heavily exposed to risks and the rewards tied to China's economy and politics."
Some emerging-market ETFs bet even bigger on China. Emerging Markets Internet & Ecommerce has 52% of assets invested in Chinese companies, including heavy stakes in Alibaba, Tencent and JD.com, Rosenbluth notes.
S&P 500 Exposure To China
Don't assume that only investing in the S&P 500 protects you from China risks.
Nearly a dozen stocks in the S&P 500 — including Monolithic Power, Texas Instruments and Estee Lauder — report getting 20% or more of their revenue from China, says data from S&P Global Market Intelligence.
Shares of chipmaker Nvidia are down nearly 55% this year. The company gets roughly a quarter of its revenue from China, including Hong Kong. Computer chip manufacturing is an arena in which the U.S. and China vigorously compete.
And yet, shares of the S&P 500 companies highly dependent on China are holding up better than China ETFs. As a group, they're down an average 32% this year.
Playing China In A Lower-Risk Way
Giving up on China altogether, though, isn't a sacrifice many investors are willing to make. After all, China's economy is seen growing 3.3% this year, says the Economist, topping the U.S.' expected 1.5% growth.
And there are ways to mitigate risk using ETFs, Rosenbluth says.
"For those investors who want a way to maintain broad market exposure in a low-risk way, iShares MSCI Emerging Markets Min Vol is a good alternative," Rosenbluth said. It has 25% exposure to China but through less-volatile stocks than those found in iShares MSCI Emerging Markets and iShares Core MSCI Emerging Markets.
For instance, the $7.6-billion-in-assets ETF's top holding is Saudi Araba's Al Rajhi Bank, and none of the top-three positions is based in mainland China.
That broader diversification is helping now. Shares of iShares MSCI Emerging Markets Min Vol are only down 18.4% this year. That's roughly in line with the S&P 500's drop this year.
ETF investors will try to remain exposed to China without being too vulnerable to political changes there.
Exposed To China
S&P 500 reporting the highest percentages of revenue from China
| Company | Symbol | Revenue from China |
|---|---|---|
| Monolithic Power Systems | 55.6% | |
| Texas Instruments | 53.6 | |
| Estée Lauder | 32.9 | |
| Applied Materials | 31.7 | |
| KLA | 28.9 | |
| ON Semiconductor | 28.2 | |
| Qorvo | 27.3 | |
| Amphenol | 26.9 | |
| Nvidia | 25.8 | |
| Tesla | 24.6 | |
| Western Digital | 24.1 |
Sources: IBD, S&P Global Market Intelligence
Follow Matt Krantz on Twitter @mattkrantz
