The core tradeoff is simple: emerging markets ETFs give you a broad basket of developing economies, but they’re often dominated by China because of its size. If you want diversification across many countries, broad emerging markets work well. If you want to control China’s weight or exclude it entirely, you’ll need to choose “EM ex-China” funds or buy a separate China sleeve. Your choice depends on whether you want the market-cap-weighted emerging markets portfolio or a customized regional split.
Five-point checklist to compare fairly:
- What index does it track? (MSCI Emerging Markets, FTSE, or ex-China variants?)
- How much is allocated to China? (Check the factsheet.)
- What’s the total concentration in the top 10 holdings? (High concentration = higher risk.)
- What are the annual fees? (Typically 0.08% to 0.70% for passive ETFs.)
- What’s the drawdown history and volatility? (How did it perform during market stress?)
What You’re Really Comparing (Definitions)
Emerging Market ETF
An emerging market ETF is a fund that tracks an index of companies from countries classified as “emerging” or “developing” by major index providers like MSCI or FTSE Russell. These funds hold dozens or hundreds of stocks across multiple countries-typically in Asia, Eastern Europe, Latin America, and the Middle East. They’re index-driven, meaning they simply own whatever the index says to own, in the same weightings.
China-Only ETF (or China Sleeve)
A China-only ETF or “China sleeve” is a fund that focuses exclusively on Chinese equities. It might track the mainland Chinese market (via A-shares or H-shares), Hong Kong-listed stocks, or a combination. Buying a separate China sleeve gives you explicit control: you decide how much China exposure you want, independent of the broader emerging market allocation.
EM ex-China ETF
An EM ex-China ETF tracks the same emerging market index as a standard emerging market fund, but it removes all Chinese companies before construction. This creates a basket of emerging markets minus the world’s second-largest economy. It exists specifically for investors who want emerging markets exposure without China’s weight or unique risks.
Why China Is (Often) the Biggest Driver Inside Emerging Markets
When you buy a broad emerging market ETF, you’re buying according to market-capitalization weighting. This means the largest companies get the largest ownership stakes.
China has the second-largest economy in the world. Because of its size and the number of publicly traded companies, Chinese stocks often represent 15% to 35% of a typical emerging market index, depending on the specific index and the year. (Exact weights shift constantly-check the index provider’s website.)
Here’s the practical consequence: During periods when China performs well, emerging markets perform well. During periods when China struggles, emerging markets often struggle too. This creates what feels like a diversification benefit that isn’t really there. You think you’re owning 25 countries, but you’re really betting heavily on one.
Index providers use rules like “free-float adjusted market capitalization” and “accessibility thresholds” to decide what to include and how much. These rules are designed to reflect real, investable markets-not to create balance across regions. The result is that China’s weight reflects China’s actual economic importance, not a theoretical diversification ideal.
3 Ways Investors Get Emerging Markets Exposure (The Menu)
Option 1: Broad Emerging Markets ETF (China Included)
What you own: A market-cap-weighted basket of the largest emerging economies, with China as a major holding.
Pros:
- Simple one-fund approach
- You own the “real” emerging markets index
- Lower costs than managing multiple funds
- Easier to rebalance and track
Cons:
- High concentration in China (typically 15–35% of holdings)
- You can’t easily control China’s weight if geopolitical risks concern you
- EM performance becomes highly correlated with Chinese performance
- Less true diversification across regions than the fund’s name suggests
Option 2: EM ex-China ETF
What you own: All the emerging market companies, except China-typically Brazil, India, South Korea, Mexico, Taiwan, and smaller markets.
Pros:
- Reduces single-country concentration
- More balanced regional diversification
- Allows you to manage China risk separately if you choose
- Removes dependency on Chinese regulatory or geopolitical developments
Cons:
- You’re excluding the world’s second-largest economy (arguably not “true” emerging markets)
- EM ex-China performance can diverge significantly from broad EM
- Slightly higher fees (smaller fund universe)
- Fewer holdings means higher per-company concentration risk
Option 3: Split Approach (EM ex-China + Separate China Sleeve)
What you own: An EM ex-China fund for regional diversification, plus a separate China ETF in a custom weight.
Pros:
- Maximum control over China exposure (5%, 10%, 25%-your choice)
- True diversification if you believe China and broader emerging markets have different drivers
- Flexibility to adjust China weight as your views change
- Can separately evaluate China’s valuation and risks
Cons:
- More complex to manage and rebalance
- Two separate holdings instead of one
- Twice the potential fees (though likely still low)
- Requires active decision-making about China’s weight
Returns Comparison (How to Compare Fairly)
When comparing returns across these three approaches, watch for common traps that distort the picture.
The Timeframe Trap
A fund that underperformed over the last 3 years might have outperformed over the last 10. China’s weight in emerging markets has varied dramatically over time-sometimes up, sometimes down. Always check multiple periods: 1 year, 3 years, 5 years, 10 years, and any full market cycle you can find. No single timeframe tells the whole story.
Dividend vs. Price Return
Some fund comparisons show “total return” (price + dividends), others show “price return” only. Always use total return for accuracy. Emerging markets companies often pay dividends; ignoring them distorts the real outcome.
Currency Effects
If you live outside the US, currency movements matter. A China ETF priced in US dollars can gain or lose value depending on how the yuan moves. An EM ex-China fund that includes Korea, India, and Brazil will have different currency exposures. Know whether your comparison is in USD, EUR, or local currency.
Fair Comparison Table
| Approach | What You’re Exposed To | Index It Typically Tracks | Typical Benefit | Typical Drawback |
|---|---|---|---|---|
| EM with China | 25+ emerging countries, heavily weighted to China | MSCI Emerging Markets (or equivalent) | Simple, market-cap-weighted, one fund | High China concentration, less regional balance |
| EM ex-China | Emerging markets minus China (India, Brazil, Korea, etc.) | MSCI Emerging Markets ex-China (or equivalent) | Reduced single-country risk, more regional spread | Excludes 2nd-largest economy, higher fees |
| EM ex-China + China Sleeve | You decide the mix of non-China EM + China | Two indices: EM ex-China + China-focused | Full control over China weight, true diversification | Two holdings to manage, requires rebalancing decisions |
Risk Comparison That Matters in Real Portfolios
Risk isn’t just about how much a fund goes up and down. It’s about what could go wrong and how that affects your goals.
Concentration Risk
When China is 30% of your emerging market ETF, you have significant single-country risk. If Chinese markets crash 20%, your entire emerging market fund drops roughly 6%. That’s not just volatility-it’s concentration. EM ex-China spreads risk across more countries, but it creates its own concentration problem: Brazil and India become larger holdings, so your fund becomes sensitive to Brazil’s and India’s policies. There’s no way to escape concentration entirely; you’re just choosing which countries to concentrate in.
Volatility and Drawdowns
Emerging market ETFs are more volatile than US stock ETFs, period. They tend to swing 30–50% over a 2–3 year period during market stress. China has historically been at the upper end of that range. EM ex-China is usually somewhat less volatile, but the difference is modest-maybe 5–10% lower during the worst periods. The real question isn’t whether volatility will happen; it’s whether you can stomach it.
Correlation and True Diversification
If you already own a US stock ETF, adding an emerging market ETF with heavy China exposure might feel diversifying-but less than you’d think. China’s economy is increasingly tied to global demand, not independent. EM ex-China can feel more truly diversified because Brazil, India, and Korea have more distinct economic drivers. But again, check the correlation numbers in your fund’s factsheet. Don’t assume; measure.
Risk Lens Table
| Risk Factor | EM with China | EM ex-China | China Sleeve | How to Interpret |
|---|---|---|---|---|
| Single-country concentration | High (China ~20–35%) | Medium (India, Brazil ~5–10% each) | User-defined | Lower is typically better, but not absolute; depends on your other holdings |
| Volatility (expected annual range) | 18–28% | 16–24% | 20–35% | Higher = larger swings; match to your risk tolerance |
| Geopolitical/regulatory risk | Concentrated in China | Spread across many countries | Concentrated in China | Consider your views on China’s regulatory environment |
| Currency exposure | Heavy CNY exposure | Spread across BRL, INR, KRW, MXN, etc. | CNY only | Matters if you expect currency moves; otherwise less relevant |
When Excluding China Can Make Sense (Conceptually)
Investors Who Want Less Single-Country Concentration
If you already have significant China exposure elsewhere in your portfolio (maybe through tech stocks or crypto), EM ex-China lets you add emerging markets without doubling down on China. This is a legitimate portfolio strategy.
Investors With Policy or Regulatory Risk Sensitivity
China’s regulatory environment is different from other emerging markets. Government can move quickly on tech, finance, education, and other sectors. If you’re uncomfortable with that level of regulatory uncertainty, EM ex-China removes it from your emerging market sleeve.
Investors Who Prefer Balanced Regional Exposure
If your goal is to own “emerging markets as a diversification tool,” you might prefer an exposure where no single country dominates. EM ex-China gets you closer to that goal, even if Brazil or India still have meaningful weights.
When Keeping China Inside EM Can Make Sense (Conceptually)
Investors Who Want the Market Portfolio of Emerging Markets
If your philosophy is “own the whole market in its natural proportions,” then China’s 20–30% weight reflects reality. Excluding it is creating an artificial market distortion. The world’s second-largest economy shouldn’t be arbitrarily removed from an emerging market index.
Investors Who Don’t Want to Make Active Decisions
Choosing between EM and EM ex-China is a decision. Choosing a split between the two is even more of a decision. Broad emerging markets let you invest once and not worry about rebalancing across China/non-China boundaries. It’s simpler.
Investors Who Accept Higher Dispersion
Dispersion means “the results can swing more broadly.” Emerging markets with China included will have wider return ranges than a balanced, multi-country portfolio. Some investors accept that as the cost of owning the market.
Common Misconceptions
Misconception 1: “Emerging Markets = Diversified Automatically”
The reality: A broad emerging market ETF feels diversified because it holds many countries. But if China is 30% of the fund, you’re really betting on China with a hedge of other markets. That’s not the same as owning India, Brazil, Mexico, Korea, and smaller markets in equal proportion. A name like “Emerging Markets ETF” implies balance; the actual holdings often don’t.
Misconception 2: “EM ex-China Is Safer”
The reality: EM ex-China reduces China-specific risk, but it doesn’t reduce overall emerging market risk. You’re still exposed to currency swings, emerging market volatility, and sector concentration (India means tech; Brazil means commodities). It’s a different risk profile, not a lower one. Trading China’s regulatory risk for Brazil’s commodity price exposure isn’t inherently “safer.”
Misconception 3: “China Is Not Actually an Emerging Market”
The reality: China is classified as an emerging market by every major index provider (MSCI, FTSE Russell, S&P). Its GDP per capita, capital markets accessibility, and development stage all fit the definition. China is large and important, but it’s still emerging-not yet at the per-capita income or institutional maturity of Japan, Germany, or the US. The confusion usually arises because China is so large it dominates the emerging market category.
Misconception 4: “Emerging Markets and China Are the Same Thing”
The reality: They’re not. Broad emerging markets include India, Brazil, Mexico, Russia, South Korea, Taiwan, Indonesia, and many others. China is one major component, not the whole category. But in many time periods, they move together enough that broad emerging markets performance looks similar to China performance. This creates the illusion that they’re identical, when they’re actually correlated but distinct.
FAQs (Answers to Common Questions)
Is China Included in Emerging Markets ETF?
Yes. China is classified as an emerging market by MSCI, FTSE Russell, and other major index providers. In a standard “Emerging Markets ETF,” China is included and typically represents 15–35% of the fund’s holdings, depending on the year and index. If you want emerging markets without China, you need to specifically look for “EM ex-China” or “Emerging Markets ex-China” in the fund’s name.
Is China Considered an Emerging Market?
Yes, officially. China meets the definition: it’s a developing economy with a market-cap-weighted GNI per capita below high-income threshold, capital markets that are accessible but have some restrictions, and regulatory frameworks that differ from developed markets. China’s size makes it feel like something “other,” but by classification, it’s emerging. If index providers excluded large emerging economies, the emerging markets category would become less meaningful.
Why Is China Included in Emerging Markets ETFs?
Because it fits the definition and is investable. Index providers use rules based on per-capita income, market accessibility, market cap, and regulatory frameworks. China meets these criteria. Excluding it would require an arbitrary decision to remove the world’s second-largest economy from a category designed to represent developing markets. The index creators’ job is to reflect the real investable market, not to engineer a specific regional balance.
Emerging Markets or Just China?
That depends on your goal. If you want broad emerging markets diversification across 25+ countries, use an emerging market ETF. If you want to make a specific bet on China’s growth or tech sector, use a China-focused ETF or an active ETFs option that’s more targeted. If you want control over how much China you own, use a split of EM ex-China plus a separate China sleeve. Start with your goal; let the tool follow.
What About Emerging Market ETFs Without Too High a Weighting in China?
To answer this fairly, I can’t recommend a specific fund, but I can tell you how to evaluate one:
- Check the factsheet. Go to the ETF provider’s website (Vanguard, iShares, SPDR, etc.) and download the fund’s fact sheet. It will show the China weight and top 10 holdings.
- Compare to the index. If the ETF tracks MSCI Emerging Markets, check MSCI’s website for the current China weight. If the ETF weight matches the index weight, that’s normal; the fund is working as designed.
- Consider the alternative. If the China weight troubles you, compare it to “Emerging Markets ex-China” alternatives. See how the ex-China version’s regional breakdown looks.
- Check the fees and liquidity. A smaller fund tracking EM ex-China might have slightly higher fees or wider bid-ask spreads. Verify this on a site like your broker or Morningstar.
- Evaluate the index construction. Some active ETFs attempt to reduce China weight while staying within the emerging markets space. These have higher fees but offer a middle ground. Ask your broker or research site whether active alternatives exist.
Final Takeaway: Rules of Thumb for Decision-Making
Here are the practical rules to guide your choice:
- Define your goal first. Are you buying for diversification, for China-specific growth, for emerging markets exposure, or for regional balance? Your goal should drive your choice.
- Check the China weight monthly or quarterly. Index weights change. A fund you bought a year ago might have different China exposure now. It’s worth a quick review.
- Understand that “emerging markets” includes China. Don’t buy a broad EM ETF and then act surprised that China is a major holding. It’s by design.
- EM ex-China is not a lower-risk option; it’s a different-risk option. It reduces China concentration but increases exposure to India, Brazil, and commodity-driven economies. Different, not better.
- If you’re uncomfortable with China’s regulatory environment, say it explicitly. Don’t use “risk reduction” as a cover story. If you’re avoiding EM with China because you’re worried about Chinese policy, that’s a valid view-but own it.
- Volatility in emerging markets is normal. Both broad EM and EM ex-China will swing 20–50% over a couple of years. Don’t confuse volatility with risk unless it forces you to sell at the wrong time.
- Currency matters for non-US investors. If you live in Europe, Asia, or elsewhere, your EM ETF returns include currency effects. Know whether the fund is hedged or unhedged.
- Fees matter, but they’re not the whole story. A 0.10% fee is great, but a 0.60% fee isn’t disqualifying if the fund structure or index matches your goal. Compare total cost, not just the fee.
- Don’t cherry-pick timeframes. China’s relative performance shifts. Always look at 1-year, 3-year, 5-year, and 10-year returns to get the full picture.
- Rebalance intentionally. If you use a split (EM ex-China + China sleeve), set a rebalancing schedule. Don’t let it drift by accident.
- Understand your portfolio’s total exposure. If you own US tech ETFs, you might already have China exposure through supply chains and customers. Adding broad EM might create unintended concentration.
- Read the index methodology. It takes 10 minutes to understand how MSCI or FTSE Russell constructs their emerging markets indices. That 10 minutes will clear up half your confusion.
- This is not financial advice. Your situation is unique-your risk tolerance, time horizon, tax situation, and existing holdings are all relevant. Consult a financial advisor if you’re unsure.
- Revisit annually. As your goals, risk tolerance, or views on China and emerging markets change, your ideal exposure might change too. What made sense five years ago might not fit today.
Conclusion
The choice between a broad emerging market ETF, an EM ex-China ETF, or a split approach is fundamentally about what you want your portfolio to do. Broad emerging markets give you a market-cap-weighted basket where China’s large weight reflects its economic importance. EM ex-China gives you emerging markets exposure with less single-country concentration and more balance across regions. A split approach gives you explicit control.
There’s no universally “right” answer. There’s only the right answer for you-and that answer depends on your goals, your comfort with concentration risk, your views on China’s growth and regulatory environment, and your existing portfolio.
Start by naming your goal. Then choose the structure that serves it. Then monitor it, rebalance if needed, and remember that emerging markets, with or without China, are a long-term play. Short-term volatility is the price of admission.
Disclaimer: This content is for educational purposes only and does not constitute financial advice. Past performance is not indicative of future results. Emerging market investments carry risks including currency fluctuation, regulatory changes, and market volatility. Before making any investment decisions, consult with a qualified financial advisor who understands your specific situation, goals, and risk tolerance.