As the largest and most heavily traded ETF tracking Chinese
stocks, the iShares FTSE China 25 Index Fund (NYSE:
) has somewhat of a target on its back. Simply put, FXI is a case
study in bigger not always being better with
That much was highlighted
in early October when China ETFs were showing
signs of moving higher
. Since then, FXI is up 1.7 percent, not accounting for Friday's
As just two examples, the iShares MSCI China Index Fund (NYSE:
) and the First Trust China AlphaDEX Fund (NYSE:
) sharply outperformed FXI over the past six months. Thinly
traded and unheralded FCA has offered better than double the
returns of FXI.
Still, investors, professional and retail alike, keep their
respective torches burning for FXI. That despite the fact in its
almost nine years of life, FXI has been frequently criticized for
at least two other things beyond being a China ETF laggard.
Those being holding a small number stocks (currently 26) and
an excessive weight to financials (currently 56.2 percent). The
point being neither of those traits makes FXI an accurate
representation of the world's second-largest economy.
After almost nine years of being dominated by state-controlled
enterprises, FXI is set to change for the better,
as IndexUniverse points out
. The ETF's underlying index, the FTSE China 25 Index, last month
made room to include Hong Kong-listed P-chips. P-chips are
non-state run firms based outside of mainland China run by
Chinese entrepreneurs, as IndexUniverse reports.
Bottom line: The inclusion of these companies in the FTSE
China 25 Index should mean investors will be treated to a more
diverse version of FXI following the ETF's next rebalancing.
Tencent Holdings, China's largest Internet company, and Belle
International, the country's largest shoe retailer, have already
made a home in the index,
according to FTSE data
And? Well, in a sign that news of potential changes to FXI are
perhaps greatly overstated, there is no "and." Tencent and Bella
are the only P-chips currently in the ETF's index and the two
combine for less than 10 percent of the index's weight.
Additionally, including those two companies does not mean FXI
will have two more constituents.
Rather, as FTSE points out, Yanzhou Coal (NYSE:
) and Zijin Mining have been removed meaning the FTSE China 25
Index has, wait for it, 25 stocks.
Certainly, it is meaningful that FXI will eventually include
Tencent and Belle, but there is no need for investors to wait
around for the rebalance. MCHI's underlying index, the MSCI China
Index, already includes P-chips. Tencent, Belle and others have
already been constituents in that 139-stock ETF.
That is the same MCHI that is 12 basis points cheaper per year
than FXI. The same MCHI that has outperformed FXI by fivefold
over the past 12 months. It is nice that FXI is likely going to
become a little more diverse, but China bulls need not wait for
that event because MCHI is open for business.
For more on China ETFs, click
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