ETF Edge

How rising U.S.-China tensions could impact emerging market ETFs

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How rising U.S.-China tensions could impact emerging market ETFs

Chinese stocks could be in for a curveball.

The Senate passed a bill last week that could restrict certain Chinese companies from listing on domestic exchanges unless they comply with regulatory standards. The move risks forcing U.S.-listed Chinese stocks to be removed from American markets.

Since China accounts for about 40% of most diversified emerging-market ETFs, that could pose an issue for some funds, said Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA Research.

Those include the Vanguard FTSE Emerging Markets Index Fund ETF Shares (VWO), the iShares MSCI Emerging Markets ETF (EEM) and the iShares Core MSCI Emerging Markets ETF (IEMG). All three are down 16-17% year to date.

"What is easily lost, I think, on many investors is that Alibaba and, among others, trade on the New York Stock Exchange or the Nasdaq. So, these are those companies that could be impacted," Rosenbluth said Wednesday on CNBC's "ETF Edge."

"If they're delisted, obviously they would no longer trade here. They would no longer be in the index," he said. "So it's important to make sure investors look inside and know what their exposure to China is in their emerging-markets ETF as well as where they're getting that exposure."

Smaller ETFs such as the Alpha Architect Freedom 100 Emerging Markets ETF (FRDM), which rules Chinese stocks out of its freedom-weighted portfolio, might come in handy for those looking to lower their China exposure, Rosenbluth said.

Douglas Yones, head of exchange-traded products at the New York Stock Exchange, wasn't as worried about a potential blow to emerging-markets ETFs as he was about a larger shift in the global investing landscape.

"There are quite a few ETFs that cover the Chinese companies, but it doesn't always necessarily state where that company has to list," Yones said in the same "ETF Edge" interview.

"Let's say a company was currently listed in the United States. If it were to move to another market, it might just stay at the same weighting, same percentage within that ETF and the ETF is now just buying and selling the Chinese company on another market," he said. "So, the net impact to ETFs, I think, could potentially be muted, but the net impact to the overall global capital markets, I think that's real and something that we want to make sure we're weighing and balancing before we make any major changes."

IndexIQ Chief Investment Officer Salvatore Bruno agreed that rising U.S.-China tensions would likely have broader ramifications on the political and macroeconomic front than in the stock market.

"Nothing is really new" in this ongoing tete-a-tete, Bruno said in the same "ETF Edge" interview. "We all know about the Chinese accounting issues and their lack of transparency sometimes and the audit issues, but it's coming up now during a time period where we're seeing increased tensions. ... To me, this is just kind of one of the bricks in the wall there."

Bruno's bottom line? Don't just focus on how this will affect ETFs.

"I think it's a political bargaining chip, if you will, between the administration and how they approach China," he said.

EEM, VWO and IEMG closed slightly higher on Wednesday.