On Wednesday, Matthews Asia rolled out an actively managed emerging market ETF that excludes China; previously launched funds covering that particular designation have all been passively managed.
The Matthews Emerging Markets ex China Active ETF (MEMX) invests in companies that the fund’s managers see as likely to provide sustainable growth based on fundamentals-based data.
MEMX comes with an expense ratio of 0.49% and lists on the NYSE Arca.
China has dominated emerging markets over the last decade, representing as much as 30% of the region in some indexes. However, the COVID-19 pandemic and China’s accompanying zero-COVID policy has been a severe drag on its economy. Its market was down more than 20% last year and a similar amount in 2021.
There are many reasons investors might consider an emerging market fund that excludes a badly performing heavyweight. Indeed, the passively managed $3.1 billion iShares MSCI Emerging Markets ex China ETF (EMXC) pulled in $1.5 billion in flows during 2022.
“Ultimately, what the emerging markets ex-China ETF does is gives control of the China allocation back to the end asset owner,” said MEMX lead manager John Paul Lech. “There are people who, for a variety of different reasons, want that allocation to be at zero, and there are people who believe that, because of the prominence of China being the world's second-largest economy, it deserves its own dedicated allocation.”
MEMX’s cost is considerably higher than that of its passive counterparts. EMXC only charges 0.25% in expense ratio, while the $157.4 million Columbia EM Core ex-China ETF (XCEM) is even cheaper, at 0.16%. However, those are broad-market funds holding hundreds of securities, while MEMX is a high-conviction portfolio of around 50 holdings.
Among the top holdings are Taiwan Semiconductor Manufacturing Co. at 8.7% of the portfolio, followed by Samsung Electronics Co. at 6.2% and Prudential PLC at 4%.
The issuer already offers the Matthews Emerging Markets Equity Active ETF (MEM), which holds around 55 securities and lists Lech as its lead manager. There’s also the Matthews China Active ETF (MCH), with about 60 equity positions. Lech says there is intentionally significant overlap between MEM and MEMX, noting that both funds use the same investment approach, just with a geographical difference. Investors in MEMX can potentially use MCH to manage their exposure to China’s markets if they wish.
According to Lech, Matthews Asia uses a “5C” framework for evaluating companies: competitive position, capital allocation, capital structure, cash flow and character.
“This is really the same team [that MEM has]. It's really the same basic DNA of what we've been doing in EM, just reverting that China allocation portion to end-asset-owners who want to control that,” Lech said.
Although Matthews Asia is new to the ETF industry, having launched its first funds last summer, the firm was founded 30 years ago. It described itself as “the largest dedicated Asia investment specialist in the United States,” in a recent press release.
In addition to its growing ETF lineup, the issuer offers a range of Asia-focused mutual funds. With the launch of MEMX, its family of ETFs includes four funds with combined assets of more than $150 million.
Contact Heather Bell at [email protected]