Modern portfolio construction requires flexibility. Investors look for tools that aim to offer different exposures to different geographic regions as global markets evolve and correlations, which measure how closely (or not closely) different assets move together, across those markets and their assets shift. China's emergence and growth as a major, and sometimes majority, constituent of emerging market indices has created upside and downside for investors seeking to customize their global exposures.

The KraneShares MSCI Emerging Markets ex China Index ETF (Ticker: KEMX) seeks to address this challenge of customization by enabling broad market access to emerging markets while excluding China entirely. This approach enables investors to tightly control their China exposure rather than simply accepting whatever weightings broad emerging market benchmarks dictate.

Let’s explore KEMX and how it may be able to help investors.

The Necessity and Art of Separate Sovereign Allocations

The rest of the emerging markets and China have experienced a decoupling in recent years. This has been particularly visible since the pandemic when Beijing's policy changes frequently dictated market sentiment.¹

In addition, returns have diverged. China has been facing unique macro challenges while other emerging markets have demonstrated varied performance patterns driven by their own distinct economic drivers. This divergence has created a compelling rationale for treating China as a distinct allocation rather than bundling it within a simple but incomplete emerging market exposure.

Another twist is that many global investors already maintain direct China allocations through dedicated funds or individual securities. Adding traditional emerging market funds that include China often results in unintended concentration.

KEMX tracks the MSCI Emerging Markets ex China Index which provides exposure to large-cap and mid-cap companies across 23 emerging market countries while completely excluding China and Hong Kong. This solves for the concentration issue and provides a foundation for building customized emerging market portfolios.

Emerging From Behind China's Shadow

As much as China remains the primary focus for most EM allocations, the remaining emerging market universe offers their own distinct investment characteristics and growth drivers. India, Taiwan, South Korea, and Brazil are all robust economies, and the remaining members present policy environments and market dynamics that operate independently of China's influence.

Technology companies across all of these markets are driving innovations in semiconductors, telecommunications, and more broadly across digital services. The semiconductor industry is projected to reach $1 trillion by 2030. Many of the leading manufacturers for those products are located in emerging markets outside China.²

KEMX enables investors wishing to access these diverse opportunities. It does so without the complexity of managing individual country allocations or attempting to screen China exposure from broader emerging market funds using complicated hedging strategies.

Bespoke Country Allocation

The customization that KEMX can help to provide becomes particularly valuable when it is combined with dedicated China exposures gained from other vehicles.

This approach allows investors to weight China not just according to their conviction and risk tolerance but also to the sector level while maintaining broad emerging market diversification.

For instance, investors bullish on China's long-term tech sector growth potential can overweight dedicated China tech funds in addition to their standard China fund while using KEMX to capture the remaining emerging market opportunity.

Those seeking reduced China exposure can underweight dedicated China allocations altogether while still maintaining emerging market participation through KEMX. This flexibility has proven relevant given China's unique position on the international stage when it comes to facing trade tensions, regulatory changes, and economic transitions.

The segmented approach can address many timing considerations that pop up. China’s policies evolve and market conditions change. KEMX lets investors dial up or dial down their dedicated China exposure independently of their broader emerging market allocation so they can focus on the evolving circumstances. This dynamic capability may help manage risk during volatile periods.

Building Flexible Emerging Market Exposure

KEMX positions investors to capture broad emerging market themes while maintaining complete flexibility over their China exposure.

KEMX offers investors a tool that could help build emerging market exposure to their personal preferences. As portfolio construction continues to shift towards a greater level of customization, investors can design their China allocation strategy with intention while capturing the potentially compelling opportunities emerging markets provide beyond the world's second-largest economy.

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Citations:

1. "The case for emerging markets ex-China," abrdn, accessed June 16, 2025, https://www.aberdeeninvestments.com/en-us/investor/insights-and-research/the-case-for-emerging-markets-ex-china.
2. "Beyond China: What does the rest of the EM equity world have to offer?" Wellington Management, November 29, 2023, https://www.wellington.com/en/insights/emerging-markets-equity-ex-China.
3. "New Horizons: Rethinking Emerging Markets and China," Goldman Sachs Asset Management, accessed June 16, 2025, https://am.gs.com/en-us/advisors/insights/article/2025/new-horizons-rethinking-emerging-markets-and-china.

For KEMX standard performance, top 10 holdings, risks, and other fund information, please click here.

Diversification does not ensure a profit or guarantee against a loss.