National Security Emerging Markets Index ETF (NSI)

The National Security Emerging Markets Index ETF (NSI) is a passive fund that replicates the MSCI Emerging Markets Select Security Excluded Index, holding emerging-market equities while excluding companies deemed to pose U.S. national security risks — primarily Chinese firms and those engaged in restricted defense or surveillance activity.

What does NSI actually hold?

NSI tracks an MSCI-maintained index that covers emerging-market equities with security-related exclusions applied. The exclusion list includes firms on U.S. Department of Defense and Treasury watchlists, companies engaged in weapons production or surveillance technology, and much of the Chinese market — particularly internet, semiconductor, and telecommunications firms. The result is a basket of emerging-market stocks from India, Brazil, Mexico, Indonesia, South Korea, Taiwan, and other markets, but with a notable absence of Chinese exposure.

India and South Korea typically gain outsized weight in the NSI portfolio as a result, since the largest Chinese companies are removed. The fund rebalances as the underlying index updates, typically quarterly, and whenever the U.S. government adds or removes a company from the restricted list. This means the fund’s holdings and weights can shift sharply on geopolitical news or policy changes independent of market movements.

Who manages NSI and what’s its structure?

iShares, the exchange-traded fund brand of BlackRock, sponsors and manages NSI. The fund is fully passive — iShares does not make stock-picking decisions but holds the stocks in the underlying index in their designated weights. NSI was launched in the early 2020s as emerging-market geopolitical tensions intensified and U.S. regulators focused more sharply on supply-chain security and defense industrial policy.

NSI trades on U.S. stock exchanges with intraday liquidity. Like all ETFs, its net asset value is computed and published daily, and authorized participants arbitrage any gap between the fund’s market price and its underlying holdings value. Investors can buy and sell NSI through any standard brokerage account and hold it in retirement or taxable accounts.

What drives the fund’s performance and risks?

The first risk is policy risk. The exclusion criteria — what counts as a “national security concern” — are set by executive regulation and Treasury policy. A change in administration or geopolitical circumstances could alter which companies are restricted, forcing the fund to buy or sell holdings unexpectedly. Investors have accepted that security policy will shape the fund’s composition over time.

The second risk is concentration. By excluding a large and growing portion of the Chinese market — traditionally a heavyweight in emerging markets — NSI becomes overweight non-China emerging markets, especially India. This is a deliberate feature, but it means NSI’s returns depend more heavily on Indian and South Korean performance than they would in an unrestricted emerging-markets index. When China’s growth outpaces India’s, NSI will lag; when India leads, NSI outperforms.

A third risk is forced selling. When a company is newly added to the restricted list, NSI must sell it, and the fund does not choose the timing. A sudden removal can trigger a short-term valuation hit as the fund is forced to exit, and NSI holders bear that loss.

The fund’s expense ratio is modest — typical of passive iShares ETFs — but a reader should verify the current rate in the prospectus, as it may include some tracking error relative to the theoretical index return.

How should readers approach NSI?

NSI suits investors seeking emerging-market equity exposure without Chinese companies or who face compliance requirements in regulated industries. It is not suitable for investors seeking pure emerging-market returns; it is a tilted, geopolitically screened subset. Performance depends heavily on whether India and South Korea outperform or underperform China, and on the health of broader emerging markets — which fluctuate widely with commodity prices, currency movements, and global growth.

Readers should start with iShares’ current prospectus and fact sheet, which show holdings, country and sector weightings, and the exclusion methodology. The MSCI Emerging Markets Select Security Excluded Index methodology document explains the precise criteria for inclusion and exclusion. Investors should monitor U.S. Treasury, State Department, and Department of Defense announcements about newly restricted companies, as these changes flow directly into NSI’s portfolio and can create unexpected volatility. Like all emerging-markets funds, NSI is best viewed as a high-growth, higher-volatility position rather than a core portfolio holding.