Avoiding China Has Been a Winning Investment Strategy. But It Isn’t Easy.

Investors in emerging-market stocks have profited this year by staying away from China.

The MSCI China Index is down 8% this year through Nov. 15, while a broader emerging-markets benchmark that excludes China has risen 8% over the same period. Chinese stocks have been weighed down by the country’s shaky economic reopening, a pullback by foreign portfolio managers and an increasing reluctance among the country’s small investors to buy stocks.

The large divergence in performance, and geopolitical tensions between the U.S. and China, have fueled a drive toward exchange-traded funds that exclude Chinese stocks. BlackRock’s iShares ETF that tracks the MSCI Emerging Markets ex China Index has more than doubled in size this year to $7.6 billion as of this week. A few other ETFs that offer similar strategies also have doubled their assets under management.

The Thrift Savings Plan, which holds the retirement savings of U.S. federal employees and members of the uniformed services, has a large international stock fund that will shift to tracking a global MSCI benchmark that excludes China and Hong Kong. The international index fund has $68 billion from plan participants and will make the transition next year, the Federal Retirement Thrift Investment Board said this week.

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