In November 2019, exchange-traded fund (ETF) index-providers began allocating between 33% and 37% of their emerging market funds to Chinese companies, resulting in more than $400 million flowing into the country.[1] The trend is on track to continue: US portfolio investment in the Chinese market could increase to more than US $1 trillion by the end of 2021.[2] This exposes investors to political and financial risk that they are not aware of, and which companies are not incentivized to actively inform them of. The solution is to implement SEC regulations that focus on improving transparency for the individual investors that increasingly make up the ETF market.
This type of reallocation increases political risk because economic policy in both the US and China is trending toward economic decoupling. This is not likely to change in the short term. On the US side, competition with China has bipartisan support, and 60% of the population holds a negative view of the Chinese government.[3] On the Chinese, “Made in China 2025” and the dramatic decrease in Chinese foreign direct investment in the US—from $60 billion in 2016[4] to only $5.5 billion in 2019[5]—make clear the intention to decouple. Finally, it took over 1.5 years to arrive at the Phase One trade deal, and observers have commented that it does not demonstrate a commitment to improving long-term relations.[6] By investing so heavily in China, index-providers are not only counteracting US economic policy, but are increasing the extent to which investors’ portfolios would be impacted if the US-China relationship continues to deteriorate.
Meanwhile, allocating such a large proportion of investments to a single market increases rather than mitigates financial risk, which runs counter to the purpose of investing in an index. Emerging market ETFs distribute risk by investing in several developing economies at once. For example, MSCI advertises their index as covering 26 markets,[7] and Vanguard’s overview page touts investments in several BRICS countries.[8] In reality, however, the November 2019 change means 33% of MSCI and 37% of Vanguard funds are invested in China—and these numbers rise even further, to 44%[9] and a whopping 51%,[10] respectively, when investments in Taiwan are included (relevant for risk assessment purposes because Taiwan’s trade with China exceeds its trade with the US, Japan, and South Korea combined).[11] This means that investors who purchased these ETFs did so expecting a diversified portfolio, but instead inadvertently committed half their funds to a single market.
It would be reasonable to think that index-providers make allocation changes to maximize long-term growth, but that is not what motivates them. The SEC clarifies that ETF investment advisors owe a fiduciary duty to the fund, not to its shareholders.[12] This means that the goal is to increase assets under management, and therefore generate revenue—not to maximize long term growth for investors.[13]
Current ETF transparency rules are written in such a way that protects institutional traders.[14] Instead, the SEC must impose active reporting requirements on index-providers so that individual investors—who are leading the charge in ETF adoption—are protected. An ideal way to do this would be to require annual notification of portfolio changes in a brief, one-page publication that highlights any major alterations in investment strategy. This would be far more effective than an annual prospectus in allowing individual investors to perceive shifts in the fund’s composition over time: instead of requiring investors to download a long PDF file and search for a needle in a haystack, this would allow those who disagree with the reallocations sell their holdings after a quick glance. In addition to being more consumer-friendly, this would also benefit index providers by reducing potential legal liability concerning insufficient informed consent as to political and financial risk.
新馆肺炎以前，交易所交易基金的公司开始了分配从33%到37%的新兴市场资金在中国公司。这新办法导致四千亿美元进入中国市场。因为交易所交易基金公司开始了这新做法，美国普通投资者收到了更多没意识到了的政治性和金融行风险。还有，管理钱的公司没有好法律的刺激告诉客户他们的钱的风险改变了这样。
这分配额很奇怪，因为那时候中美关系恶化了。因为两国的经济政策开始去耦，所以这新做法提高了政治性风险。虽然新馆肺炎的结果是中美没有去耦，可是两国还在竞争。 在美国，跟中国竞争是其中最流行的政策，有两党制的支持。此外，大部分老百姓对共产党有谴责性的影响。一方面，中国的政府也开始限制中国公司在美国的活动。中国在美国的外商直接投资跳水了。2016总数是六百亿美元，然后2019只是六十三亿，和2020是七十二亿。所以，虽然去耦不是完全的，但是两国都限制经济的相互活动。因为他们在中国市场投资了四千亿美元，交易所交易基金公司不仅抵消一点美国政府的经济政策，但如果中美关系继续恶化，也使投资者的投资组合收到更多风险的影响。
除了政治性风险以外，还有经济风险。一般来说，买交易所交易基金和股票指数的投资者想要混业他们的资金。可是，分配那么大的百分比在一个市场反而提高风险，抵触在股票指数投资的目的。新兴市场的交易所交易基金控制风险的办法是他们在不同发展的市场同时投资。比如，明晟公司（MSCI）的营销说他们的股票指数投资的地方包括26市场，和先锋领航集团（Vanguard）的新兴市场交易所交易基金一览网页说他们的投资在不同金砖国家分布了。可是实际上，新馆肺炎以前的2019十一月新方法改变了明晟公司和先锋领航集团的股票指数分配额。变化以后，33%的明晟公司新兴市场交易所交易基金和37%先锋领航集团的新兴市场交易所交易基金的资金是在中国投资了—格外，如果在台湾的投资也这计算在内，总数分别变得44%和51%（台湾对这样的计算有关系，因为他们的跟中国贸易最大的，超过跟美国，日本，和韩国都加上了）。所以，结果是买这些交易所交易基金的投资者以为他们买了有多种的分配额，但反而无心得使一半的他们的钱在一个市场投资了。
设想股票指数公司的改变分配额的动因是长时间价值的最大化有道理，可是，这并不是他们的动因。美国证券交易委员会（SEC）明确交易所交易基金公司的委托责任是对基金组织，不是对基金组织的股东。这就是说，股票指数公司的目的是增加管理资产，从而提高收入—不是长时间价值的最大化。
现在的 交易所交易基金透明度规定保护机构投资者。相反，美国证券交易委员会的规制需要要求股票指数公司积极报导，以便散户也保护了。
(Please note: I am still learning Chinese and translated this piece myself, so advanced and native speakers may find mistakes or odd word choices.)
[1] Foreign Policy, “Americans Are Investing More in China—and They Don’t Even Know It,” https://foreignpolicy.com/2020/01/14/americans-investment-china-emerging-markets-united-states-trade-war/
[2] Foreign Policy, “Americans Are Investing More in China—and They Don’t Even Know It,” https://foreignpolicy.com/2020/01/14/americans-investment-china-emerging-markets-united-states-trade-war/
[3] Pew Research Center, “People around the globe are divided in their opinions of China,” https://www.pewresearch.org/fact-tank/2019/12/05/people-around-the-globe-are-divided-in-their-opinions-of-china/
[4] Rhodium Group, “Two-Way Street: 2019 Update US-China Direct Investment Trends,” https://rhg.com/research/two-way-street-2019-update-us-china-direct-investment-trends/
[5] Xinhua, “Chinese investments in North America, Europe hit 9-year low in 2019: report,” http://www.xinhuanet.com/english/2020-01/09/c_138690620.htm
[6] Business Insider, “Trump’s trade deal with China looks designed to implode,” https://www.businessinsider.com/trump-china-phase-one-tariff-trade-deal-enforcement-mechanism-implode-2020-1
[7] MSCI, “MSCI Emerging Markets Index,” https://www.msci.com/emerging-markets
[8] Vanguard, “Vanguard FTSE Emerging Markets ETF,” https://investor.vanguard.com/etf/profile/overview/vwo
[9] MSCI, “MSCI Emerging Markets Index,” https://www.msci.com/emerging-markets
[10] Vanguard, “Vanguard FTSE Emerging Markets ETF,” https://investor.vanguard.com/etf/profile/overview/vwo
[11] World’s Top Exports, “Taiwan’s Top Trading Partners,” http://www.worldstopexports.com/taiwans-top-import-partners/
[12] SEC, “Statement at Open Meeting on Exchange-Traded Funds,” https://www.sec.gov/news/public-statement/statement-peirce-etf-062818
[13] Investopedia, “ETF Profits: How Much Money Are Providers Making?” https://www.investopedia.com/news/etf-profits-how-much-money-are-providers-making/
[14] SEC, “Exchange Traded Funds: Final Rule,” https://www.sec.gov/rules/final/2019/33-10695.pdf, pp. 70-78
