UBS Asset Management has launched a new ETF in Europe providing socially responsible exposure to a diverse portfolio of emerging market equities while excluding stocks from China.
The ETF allows socially responsible investors to unpack China from their emerging market allocations.
The UBS MSCI Emerging Markets ex-China Socially Responsible UCITS ETF (AW1J) has been listed on Deutsche Börse Xetra and Borsa Italiana in euros and on SIX Swiss Exchange in US dollars.
Investors have become increasingly cautious about allocating capital to China amidst mounting economic challenges, including a deepening real estate crisis, deflation in consumer prices, declining exports, and rising youth unemployment.
Emerging market ex-China strategies offer investors the flexibility to tailor their exposure to Chinese equities within their emerging market portfolios. While some may opt to exclude China entirely, others may prefer to adjust their allocations by blending these strategies with China-focused investments according to their preferences.
Passive emerging market ex-China ETFs have gained in popularity recently; however, socially responsible investors in Europe have had limited choice for investment products that provide this type of exposure. UBS’s latest ETF aims to fill this gap, utilizing a multi-pronged ESG approach that includes norms-based, values-based, and climate-related exclusions, combined with a best-in-class ESG selection approach.
The fund comes with an expense ratio of 0.20% and is classified as an Article 8 product under the European Union’s Sustainable Finance Disclosure Regulation (SFDR).
Methodology
The underlying MSCI Emerging Markets ex-China SRI Low Carbon Select 5% Issuer Capped Index is constructed from the MSCI Emerging Markets ex-China universe which consists of large- and mid-cap companies within 23 developing economies excluding China.
With 675 constituents, the initial universe covers approximately 85% of the free float-adjusted market capitalization within each country.
The methodology first removes firms embroiled in severe ESG-related controversies as well as those involved in nuclear power, tobacco, alcohol, gambling, military weapons, civilian firearms, GMOs, adult entertainment, fossil fuels, and oil & gas.
To factor in a low carbon approach, the eligible universe of constituents is ranked by carbon emissions and the top 10% of securities, by number, are removed.
Following the above screening steps, the remaining constituents are assigned ESG scores between AAA and CCC based on MSCI ESG Research’s evaluation of the most relevant ESG factors by industry and risk exposure. Stocks with ESG ratings below A (equivalent to higher average) are also eliminated.
The methodology then selects the companies with the highest ESG ratings making up 25% of the market capitalization in each GICS-defined sector of the initial universe. Constituents are weighted by float-adjusted market capitalization, subject to a 5% cap per security.
The index is reconstituted annually and rebalanced semi-annually.