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By Christine Benz and Patricia Oey | 08-19-2015 02:00 PM

Go Active or Passive in Emerging Markets?

For investors who are worried about overexposure to China's volatile market, active funds may be a better option, says Morningstar's Patty Oey.

Christine Benz: Hi, I'm Christine Benz for The Chinese market has been in the headlines lately. Joining me to discuss the impact on emerging-markets index funds and exchange-traded funds is Patty Oey--she's a senior analyst with Morningstar.

Patty, thank you so much for being here.

Patricia Oey: Thanks, Christine.

Benz: There has been this constant barrage of news regarding China. For people who haven't been staying super plugged into the headlines, let's summarize some of the major drivers of the Chinese market over the past several months.

Oey: So, in June, the China onshore market saw a rally of about 150%. Since then, it's down about 25% to 30%. So, there has been a lot of volatility in the Chinese stock market.

Benz: So, that selling was driven by what?

Oey: People might say that what happened leading up to the rally was that MSCI was talking about adding these stocks that are traded in Shenzhen and Shanghai. They were thinking about adding these types of stocks to their indexes--

Benz: These are the A shares.

Oey: Yes, these are the A shares. If they were to do that, you'd see a lot of foreign fund flows into China. Ahead of that, a lot of the local retail investors were excited that this might help prop up the market, so they were trying to get in a little early. That kind of led to the rally. When MSCI in June announced that they were going to hold off because the markets weren't really ready yet, we started to see a big sell-off.

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