Vanguard is exploring one of the most politically significant corners of the ETF world by submitting new funds, which will provide exposure to emerging markets, including China.

According to the preliminary prospectus filed with the SEC on May 30 Vanguard Emerging Markets Former Chinese ETFs The emerging former China index of FTSE will be tracked, which omits China while maintaining extensive contact with other regions of developing countries.

This is an interesting move, especially given the current geopolitical context. United States-China relations are as tense as ever. President Donald Trump recently imposed tariffs on Chinese goods on more than 100% and then temporarily scaled them. But even without tariff drama, concerns about the Chinese market environment are growing.

Investors are increasingly experiencing Chinese government intervention in their domestic economy, suppression of high-profile companies, threats to separate Chinese companies from American politicians, and the ongoing risks to the conflict on Taiwan.

Coupled with demographic headwinds and disappointing economic growth, it’s no wonder that Chinese stocks have had an impact on sentiment in the broader emerging market categories.

This has caused losses to traditional emerging market ETFs. Two of the largest funds in this category - Ishares Core MSCI Emerging Markets ETF (IEMG) and Vanguard FTSE Emerging Markets ETF (VWO)- owns $88 billion and $86 billion in assets respectively, but with a lot of risks to China and Taiwan. IEMG allocated 26% to China and 18% to Taiwan; VWO owns 32% in China and 18% in Taiwan.

IEMG and VWO have returned 41% and 43% respectively over the past five years, lagging behind 61% of returns Pioneer International Stock ETF (VXU) During the same period.

As a result, more and more investors are turning to emerging market strategies that completely exclude China. this ISHARES MSCI Emerging Markets EX China ETF (EMXC)Launched in 2017, it only owns $3 billion in assets in early 2023. Today, it has $14 billion.

EMXC's performance is hybrid compared to its city-wide peers. Over the past five years, it has returned 58% - leading the way over VWO and IEMG. However, since its inception in July 2017, EMXC has risen 39%, similar to VWO's 40%, and is only better than IEMG's 34%.

Still, this has not stopped investors from pouring into the strategy. Now Vanguard is ready to take advantage of this demand while weakening competition. The new ETF will charge only 0.07% fees, which is much lower than the 0.25% fee for EMXC.