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Big China Stakes Dim Our View of These 2 Funds

Vanguard Emerging Markets Stock Index Fund and iShares Core MSCI Emerging Markets ETF have large stakes in Chinese stocks, which holds them back from a higher rating.

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Dan Sotiroff: Many of the broad, low-cost, index-tracking funds in Morningstar's diversified emerging-markets category have Analyst Ratings of Bronze. These include Vanguard Emerging Markets Stock Index Fund and iShares Core MSCI Emerging Markets ETF. The reason these low-cost options aren't rated higher is they have large stakes in Chinese stocks, with roughly one third of their portfolios dedicated to companies listed in China. 

The Bronze rating isn't a reflection of expectations about the Chinese market. Instead, it shows a lower level of confidence in the ability of these funds to perform well within the category, because they don't diversify their country-specific risk as well as some of their actively managed competitors.

Daniel Sotiroff does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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