For Fund Contrarians, ‘Ex’ Can Mark the Spot

Vanguard recently filed to launch a version of Vanguard Emerging Markets Stock Index VEMAX that excludes China. It’s not an unprecedented move for the firm. For instance, Vanguard Extended Market Index VEXMX, which holds all US stocks except the S&P 500, has been around since 1987. More recently, the firm launched an all-world ex-US fund in 2007 as well as an all-world ex-US small-cap fund in 2009.

What is a bit unusual about this filing, though, is that Vanguard doesn’t offer a China-only fund. So, whereas the other Vanguard “ex” funds let investors size their US equity weighting to their liking (by pairing an “ex” fund with something like Vanguard 500 VFINX or Vanguard Total Stock Market VTSMX

), this is more of an on/off switch. You can take China by investing in the standard Vanguard Emerging Markets Stock Index, or leave it by opting for the new ex-China exchange-traded fund.

Given this, I was curious to know how “ex” funds in general have fared in the periods that followed the launch of the strategy. To that end, I compiled a list of funds and ETFs that excluded a particular country by design. I avoided thematic and sector funds to focus on diversified equity strategies. That boils it down to three varieties: ex-Japan, ex-China, and ex-US.

For purposes of this analysis, I’m going to focus on ex-Japan and ex-China funds. There are 31 (excluding multiple share classes), and all but four are ex-China strategies. There have been 18 ex-Japan funds in existence since 1999, but 14 of them have been merged or liquidated since then. By contrast, every ex-China fund that’s been launched is still around, with that staying power owing mainly to the fact that most were incepted in recent years.

Number of ex-Japan and ex-China Fund Launches, by Year

All the ex-Japan funds have been regional (for example, “Asia ex-Japan”), while all the ex-China strategies cover developing markets more broadly (for example, “Emerging Markets ex-China”). That means that Japan and China have typically been significant weights in those indexes, and thus, excluding them could translate to meaningful performance differences.

To illustrate, the exhibit below compares the rolling 10-year returns of an Asia ex-Japan index with an all-Asia index that includes Japan. When the excess return was positive, it meant the Asia ex-Japan index had outperformed the standard all-Asia index, and the opposite when it was negative.

Rolling 10-Year Annual Excess Returns: Asia ex-Japan Index vs. All-Asia Index

And here is an exhibit that compares an emerging-markets ex-China index with a standard emerging-markets index that includes Chinese stocks.

Rolling 10-Year Excess Returns: Emerging-Markets ex-China Index vs. Emerging-Markets Index

Timing Matters

These performance differences can make the timing of an “ex” fund’s inception important. Given that, I tallied up the number of “ex” funds launched each year. Then I compared that tally with the difference in the annual return of the “ex-country” index and the standard index from which that country had been excluded over the subsequent 10 years.

For instance, in 2007, fund companies launched three Asia ex-Japan funds. The Asia ex-Japan index topped the standard Asia index by around 1% per year over the subsequent decade ended Dec. 31, 2017.

Number of Asia-ex Japan Funds Launched by Year vs. Subsequent ex-Japan Index Excess Return

The earlier-vintage Asia ex-Japan launches fared pretty well, as air continued to seep out of the Japanese stock market bubble. But later launches were less successful, with the Asia ex-Japan index lagging amid improving Japanese equity performance. In short, the timing of these launches made a pretty big difference.

A similar story seems to be unfolding with emerging-markets ex-China funds, though the history is limited by how new many of these funds still are. Since only two of these funds are at least 10 years old, for all the others, I compared the return of the indexes from the first day of the month following each fund’s inception month through May 31, 2025. (I excluded funds that are less than a year old.)

Number of Emerging-Markets ex-China Funds Launched vs. Subsequent ex-China Index Excess Return

The ex-China funds have done pretty well thus far, with the emerging-markets ex-China index outperforming the standard emerging-markets index over most of the periods following the launch year. However, in the case of funds that incepted within the past three years—which make up more than two-thirds of the funds—it’s too soon to say whether the bet to exclude China will pay off.

One thing ought to give investors pause, though: This recent influx of ex-China fund launches comes at the same time fund companies are pulling back on China-only equity funds. From 2009 through 2018, there was a net launch of 42 new China equity funds, but firms have launched only 16 since. And why? Chinese stocks have slumped.

That’s evident in the chart below, in which I plot the number of net new China-only equity fund launches, ex-China fund launches, and the difference in the rolling three-year returns of Chinese stocks and emerging-markets stocks more broadly. (The ex-China fund launches were net positive over this period, but the chart presents them in negative territory because they are directionally opposite bets to the China fund launches.)

Number of Ex-China Fund Launches, China Fund Launches, and Rolling Excess Returns, by Year

In summary, as China outperformed other emerging markets, fund companies tended to roll out new China-only stock strategies. But when they lagged, as they’ve done in recent years, they’ve pulled back while also bringing out new ex-China funds.

Conclusion

What might that portend for Vanguard’s forthcoming ex-China ETF? It’s hard to say, as there haven’t been many ex-country funds, and ex-China strategies are relatively new. That said, you’d probably have preferred to see Vanguard launch an ex-China fund a decade or so ago, when Chinese stocks were aloft and fund companies were launching China funds left and right, instead of now, after Chinese stocks have been in a funk.

That aside, ex-country funds haven’t had a ton of success or proven staying power. The few ex-Japan strategies that have survived haven’t generated standout results, and while the ex-China funds have fared OK thus far, it’s still early days. I expect that Vanguard will stand by its ex-China ETF over the long haul, through thick and thin, as it doesn’t typically bring out new offerings and fold them a short time later.

Nonetheless, contrarians should take note: When fund companies go “ex,” that can mark the spot.

Switched On

Here are other things I’m reading, listening to, or watching:

• Amy Arnott on what’s been a good year for holders of nondollar currencies and whether you ought to hedge back into the greenback (probably not).
• Christine Benz and Margaret Giles on how much guaranteed income you need in retirement.
• Jason Zweig on secondary funds having their cake and eating it too.
• Tyler Cowen asks which parts of the economy artificial general intelligence will affect last and how to pick a good neurosurgeon on Conversations with Tyler.
• “Bets board”: Patrick O’Shaughnessy chats with Spotify’s head of product and technology Gustav Söderström about how the firm plans and prioritizes.
• The Office Ladies interview Gene Stupnitsky and Lee Eisenberg, who wrote The Office’s all-time cringe episodes “Dinner Party” and “Scott’s Tots.”
• “Lowdown (parts i and ii)” by Michael Kiwanuka.

Don’t Be a Stranger

I love hearing from you. Have some feedback? An angle for an article? Email me at jeffrey.ptak@morningstar.com. If you’re so inclined, you can also follow me on Twitter/X at @syouth1, and I do some odds-and-ends writing on a Substack called Basis Pointing.