Kicking the Elephant Out of the Room: The Case for EM ex-China

Journal of Beta Investment Strategies, Volume 15, Issue 2

Posted: 13 Feb 2024 Last revised: 20 Mar 2024

See all articles by Lu He

Lu He

Rayliant Global Advisors

Jason C. Hsu

Research Affiliates; Rayliant Global Advisors; University of California, Los Angeles - Anderson School of Business

Phillip Wool

Rayliant Global Advisors

Date Written: January 3, 2024

Abstract

Rapid growth in the ETF market over the last two decades has made it easier for investors to add emerging markets (EM) to their portfolios, though that has also made investors more aware of the complexities and risks associated with such an allocation. Along those lines, China has recently been the “elephant in the room”, leading some to question whether a global EM allocation is worth the trouble. In this paper, we assess various arguments for a modern approach that calls for carving China out of one’s EM allocation and treating it differently from a traditional cap-weighted global emerging markets portfolio. Those considerations range from China’s size within the EM basket to more technical aspects of portfolio construction, and even sentiment toward China and value-based reasons for casting it aside. Our conclusions will help frame the discussion as to whether investors should separate China and EM ex-China, and how they might go about investing among and within those two allocations.

Keywords: Emerging Markets, International Diversification, Portfolio Construction, Portfolio Management, Asset Allocation, Manager Selection, Exchange Traded Funds

JEL Classification: G11, G15, G23, G41

Suggested Citation

He, Lu and Hsu, Jason C. and Hsu, Jason C. and Wool, Phillip, Kicking the Elephant Out of the Room: The Case for EM ex-China (January 3, 2024). Journal of Beta Investment Strategies, Volume 15, Issue 2, Available at SSRN: https://ssrn.com/abstract=4702880 or http://dx.doi.org/10.2139/ssrn.4702880

Lu He

Rayliant Global Advisors ( email )

Hong Kong

Jason C. Hsu (Contact Author)

Research Affiliates ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

HOME PAGE: http://www.jasonhsu.org

Rayliant Global Advisors ( email )

Hong Kong

University of California, Los Angeles - Anderson School of Business

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Phillip Wool

Rayliant Global Advisors ( email )

Hong Kong

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