Big China Stakes Dim Our View of These 2 Funds

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.

A Bronze rating may not be as attractive as Gold or Silver, but it's important to stress that these funds aren't bad options. Despite a relatively high allocation to Chinese stocks, they still effectively diversify stock-specific risks and charge some of the lowest fees in the category. While Chinese stocks account for roughly a third of these funds, they make up less than 4% of the total global stock market. So these funds can still be a great compliment to a portfolio that invests in stocks from the U.S. and foreign developed markets.