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New Emerging Markets ETF to Avoid Potential National Security Threats

In 2023, many people have had concerns about investing in broad emerging markets index ETFs. For some, this is based on fundamentals for Chinese stocks but for others it’s national security. Indeed, there has been bipartisan legislation proposed to tackle the potential threats. Today, on what happens to be 82 years after the attack on Pearl Harbor, a new related ETF began trading on the Nasdaq. 

The National Security Emerging Markets Index ETF (NSI) is tracking the Alerian National Security Emerging Markets Index. National Security Index is an independent, majority veteran-owned business. The NSI management team includes professionals from the fields of finance, intelligence, national security, defense, and private equity.  

How the Index Is Constructed 

This index behind NSI is run by VettaFi and it is rebalanced semiannually. It is subject to a National Security Governance process that filters out companies that test positive for at least one of nine investment screens. 

Those excluded companies are:  

  • Subject to U.S. government sanctions
  • Defense contractor in a country of concern
  • Provider of sensitive dual-use items to a hostile military 
  • Participant in state-sponsored influence operations against the U.S. or its allies 
  • Strategic threat 
  • Cybersecurity threat 
  • Espionage threat 
  • Human rights violator 
  • Operator in disputed areas of the South China Sea or East China Sea 

What Is and Is Not Inside NSI  

Index constituents still include many well-known emerging markets companies that advisors would expect to find. For example, Samsung Electronics and Taiwan Semiconductor are the largest. Others in the top 10 include American Movil, MercadoLibre, and Reliance Industries.  

Advisors and investors have turned to emerging markets ETFs in 2023 that exclude all Chinese companies. Those include the Columbia EM Core Ex-China ETF (XCEM), the iShares Emerging Markets ex China ETF (EMXC), and the Freedom 100 Emerging Markets ETF (FRDM).  

However, NSI owns Chinese companies like Meituan and NetEase. Indeed, Chinese companies recently represented 21% of the index behind NSI, an underweight relative to broad MSCI-based emerging markets ETFs. These companies are deemed appropriate by National Security Index. Meanwhile, the company’s website has more details about companies that are excluded and why. 

We will be watching to see if people concerned about China for security reasons find this a good alternative to simply excluding the large market.  

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vettafi.com is owned by VettaFi LLC (“VettaFi”). VettaFi is the index provider for NSI for which it receives an index licensing fee. However, NSI is not issued, sponsored, endorsed, or sold by VettaFi. VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of NSI.

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