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China and ESG ETF Closures Soar in the Face of Political Backlash
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More China-focused, U.S.-listed exchange-traded funds have closed since the start of this year than in any previous full year, as investors continue to stay away from the world’s second largest economy.
Liquidations of ETFs investing based on environmental, social and governance (ESG) factors are also on track to break previous records – both in the US and globally – amid a backlash against the concept.
The removals came despite ever-growing enthusiasm for ETFs globally, with 58 consecutive months of net inflows bringing assets to a record $12.7 billion at the end of March, according to ETFGI, a research firm. advice.
In the first quarter of 2024 alone, 13 U.S.-listed China ETFs closed, well beyond the previous record of five for the full year in 2020 and 2023, according to Morningstar Direct data.
Globally, 18 China ETFs closed during the quarter, more than half of last year’s record total of 34, with Global X, Xtrackers and KraneShares among the axe-bearers.
The first quarter also saw the disappearance of 30 ESG ETFs globally, according to Morningstar, on track to surpass the annual record of 72 in 2023. Xtrackers, Lyxor and WisdomTree were among the groups to prune their lineups.
“Both have become political footballs,” said Bryan Armor, director of passive strategies research for North America at Morningstar.
He said the House Select Committee on the Chinese Communist Party even went so far as to single out BlackRock and MSCI, accusing them of fueling China’s military advance or facilitating human rights abuses. man of the CCP, “while BlackRock and MSCI simply offered emerging markets and Chinese ETFs”.
The pace of launches has also slowed significantly for both investment theses. Only 33 China ETFs were disclosed in the first quarter, with all but three being domiciled in China or Taiwan. That compares to 160 in calendar year 2023 and a record 291 at the height of enthusiasm in 2021.
The 18 ESG launches in the first quarter represent an even steeper slowdown from last year’s 151 and 2021’s zenith of 313, according to Morningstar data. Only three of those launches took place in the United States, well below last year’s pace of 38 launches and 2021’s high of 75.
In the United States at least, the volume of assets held in the remaining ETFs of both categories has also declined. U.S.-listed ESG ETFs held $102 billion at the end of March, down from $117 billion at the end of 2021. U.S.-listed China ETFs held just $24.2 billion, below the $35.6 billion December 2021 dollars.
In both cases, global ETF assets increased, despite the wave of closures. Worldwide, ESG ETFs now have a record $542 billion in assets, propelled by growing demand in Europe.
Similarly, China-focused ETFs now hold $364 billion, up from $320 billion at the start of the year. In this case, growth appears to have been largely driven by China’s “national team” of state-supported institutions, which plowed RMB 410 billion ($57 billion) in domestic stock ETFs in the first two months of 2024 alone, according to UBS calculations.
In the United States and Europe combined, assets held in China ETFs fell to $34.8 billion at the end of March, 26% below the peak of $47.2 billion at the end of 2021, when many estimated that the China had been more successful than the West in terms of growth. navigating the Covid pandemic.
So far, no ETF has been launched outside China to track the country’s CSI A50 index, launched in January and designed to pump money into sectors deemed strategically important by Beijing, such as renewable energy and semiconductor manufacturing. There are 10 domestic Chinese CSI A50 ETFs.
Global geopolitics and domestic pressures, particularly in the United States, have been factors behind the decline in popularity of both concepts.
“ESG has become a political lightning rod,” said Todd Rosenbluth, head of research at VettaFi, a consultancy. “Many asset managers are less willing to offer a broad range of products than they were in the past. This style is less likely to become a hot topic again in the short term.
Another factor explaining the decline in interest is poor performance. Mainland China’s CSI 300 index has fallen 9.9 percent over the past year and 26.8 percent over three years. In comparison, the FTSE All-World Index rose 18.2 and 10.3 percent over the same periods, while the US S&P 500 Index gained 25.5 percent and 22.7 percent, respectively. .
ESG also underperformed, but not as much – which is perhaps not surprising since the funds hold many of the same stocks as non-ESG vehicles.
The iShares MSCI USA ESG Select ETF (SUSA), one of the largest such vehicles, returned 19.9 percent for the year to April 30 and 18.1 percent for three years, slightly in below 23 percent and 22.3 percent during these years. respective periods by the non-ESG iShares MSCI USA Ucits ETF (CSUS), which shares many of the same largest holdings.
This at least suggests that investor interest could be revived if Chinese and ESG stocks regain their momentum.
Armor said “narratives can change quickly once profits are at stake.” However, he warned that not all investors would be willing to change course.
“Some investors will flock to China or ESG ETFs once performance improves, but these strategies appear to be out of the question for the ideologically entrenched,” he added.
“I think the lack of interest in China-focused ETFs is more performance-driven, whereas the decline in interest in ESG ETFs is more political,” said Nate Geraci, president of financial advisor The ETF Store.
“As a result, I think it’s much more likely that money will flow back into China-focused ETFs rather than ESG ETFs – if and when performance improves. ESG has become far too politicized and I’m not sure how to overcome this in the future.