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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 (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.