One of the weaknesses of investing in emerging markets is the dominance of state-owned enterprises — companies that can get bogged down in bureaucracy. After all, governments don’t necessarily share the same goals and motivations as private business owners.
Another challenge for investors is that state-owned operations tend to lack transparency, and the data provided by these government operations can be difficult to verify. This is especially true in China, where many financial and commodity companies are state-owned.
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A new exchange-traded fund, ETF WisdomTree Emerging Markets ex-State-Owned Enterprises Fund XSOE, -0.55% seeks to provide investors with emerging-markets exposure similar to the MSCI Emerging Market Index, represented by the iShares MSCI Emerging Markets ETF EEM, -0.75% — but without holding shares of state-owned entities.
The concept is unique and does attempt to improve on what some perceive as a current defect in many existing emerging-market funds.
Still, Investors should keep in mind that many new ETFs are seductive at first glance, and this WisdomTree offering is no exception. Plus, all new ETFs need time to prove themselves as their theory is put to Mr. Market’s test. So while the rationale for this emerging-market ETF is compelling, I’d still wait at least another six months for trading liquidity to build.
Moreover, simply removing state-owned enterprises many not be enough to overcome the current economic problems negatively affecting emerging markets anytime soon.
WisdomTree Emerging Markets ex-State-Owned Enterprises Fund
iShares MSCI Emerging Market ETF