How to Hedge Your Portfolio Against Geopolitical Risk with ETFs

Excluding state-owned enterprises

The type of capitalism many investors take for granted in the U.S. often doesn’t exist in certain parts of the world—especially in emerging markets like China.

In these regions, many companies are classified as “state-owned enterprises” (SOEs), where the government holds a significant stake.

SOEs operate differently than privately owned corporations. Rather than prioritizing shareholder value, their primary objective may align with the goals of the state.

For example, a government-owned oil company might prioritize stabilizing domestic fuel prices over profitability. For foreign investors, this introduces significant, uncompensated risk, as these firms might engage in decisions that negatively impact returns without any direct benefit to investors.

Some ETF providers have recognized this issue and developed solutions. One such example is the WisdomTree Emerging Markets ex-State-Owned Enterprises Fund

.

This fund explicitly excludes SOEs, defining them as companies with over 20% government ownership. Importantly, XSOE also limits sector deviations to within 3% of the benchmark, ensuring the portfolio doesn’t veer too far from market weights or make large macroeconomic bets.

This strategy has historically paid off. From its inception on December 10, 2014, through January 29, 2025, XSOE has delivered an annualized return of 4.03%.

While this isn’t extraordinary, it’s still an improvement over the 3.14% annualized return from the popular iShares MSCI Emerging Markets ETF

, which includes SOEs.

Security selection based on geostrategic risk rating

In geopolitics, a “strategic resource” refers to assets vital to a nation’s security, economy, or global influence. These resources are often essential for maintaining a country’s stability and competitive edge.

For instance, Canada’s oil and gas reserves are unquestionably strategic, providing energy security and export revenue. Similarly, Taiwan’s dominance in semiconductor manufacturing is a critical lifeline for global technology supply chains.

While strategic resources are a boon for their respective countries, they also pose significant risks for investors. Industries tied to such resources are highly vulnerable to geopolitical disruptions.

For example, Venezuela has eyed Guyana’s oil reserves with growing interest, raising concerns about potential conflicts. Similarly, mining operations in Africa are frequently subject to nationalization or seizures amid political instability, leaving investors exposed to losses.

To address these risks, the Xtrackers US National Critical Technologies ETF

offers a unique approach. This passive ETF tracks the Solactive Whitney U.S. Critical Technologies Index, which begins with a broad universe of large- and mid-cap companies from the Solactive GBS Developed Markets Large & Mid Cap USD Index.

From this pool, it selects companies operating in 14 critical technology sectors defined by the U.S. Department of Defense in its National Defense Science and Technology Strategy (NDSTS).

1. Biotechnology
2. Quantum science
3. Future Generation Wireless Technology
4. Advanced Materials
5. Trusted AI and Autonomy
6. Integrated Network Systems-of-Systems
7. Microelectronics
8. Space Technology
9. Renewable Energy Generation and Storage
10. Advanced Computing and Software
11. Human-Machine Interfaces
12. Directed Energy
13. Hypersonics
14. Integrated Sensing and Cyber

What sets this ETF apart is its use of a “geostrategic risk rating score.” This metric evaluates a company’s exposure to nations identified by the U.S. government as posing high geopolitical risks.

By prioritizing companies with minimal exposure to such nations, the ETF aims to mitigate the likelihood and severity of sanctions, regulatory crackdowns, or asset seizures that could harm investments.

The result is a diversified portfolio of 222 companies across value and growth styles, predominantly in technology but also spanning healthcare, industrials, communications, and energy sectors.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.