Give the iShares FTSE China 25 Index Fund (NYSE:
FXI
) some credit. In the past five trading days, the largest ETF
tracking the world's second-largest economy has jumped 2.9
percent. That solid run may be enough to lead some to think the
$4.86 billion ETF and Chinese stocks in general are ready to snap
back to life.
To be sure, there are catalysts. Several weeks ago, China
pledged to spend almost $160 billion on infrastructure projects
to stimulate economic growth. Then there is no getting around the
fact that
Chinese equities and FXI itself are cheap
.
FXI trades at just 12.5 times earnings with a price-to-book
ratio of 1.55. Those numbers for the iShares MSCI Emerging
Markets Index Fund (NYSE:
EEM
) are 17.3 and three. FXI was also mentioned in positive fashion
by experts in the mainstream financial media earlier this week.
To this point, those calls look prescient.
However, if past performance is any guide, disappointment
looms. That is the case because FXI is the epitome of
a big ETF rarely being better than a smaller
equivalent
. In fact, it has already been acknowledged that FXI is rarely
the best China ETF, but because of its size and robust average
daily volume, this is the China fund most so-called experts are
comfortable recommending.
Obviously, being bullish on an ETF that is up almost three
percent in just one week is not bad advice. At least not now, but
treating FXI as the only China ETF in town is an egregious
disservice to traders and longer term investors alike.
One does not even have to venture far from FXI to find an
acceptable substitute because iShares offers one in the form of
the iShares FTSE China (HK Listed) Index Fund (NYSE:
FCHI
). One look at
FCHI's roster
shows investors will not be trading FXI's well known holdings for
exotic fare. In fact, there is considerable overlap between the
two ETFs.
Still, the FCHI and FXI are not identical twins and this is
important. FCHI has just over $31 million in AUM and average
daily turnover of less than 2,000 shares. Year-to-date, FCHI has
delivered 230 more basis points of alpha than FXI. In the past
year, that number grows to about 250 basis points. Since FCHI
debuted in mid-2008, it is down eight percent. FXI has slid 18
percent since that time. Knowing all this, folks, professionals
included still gravitate toward FXI.
The examples continue. The SPDR S&P China ETF (NYSE:
GXC
) will turn six in March and has almost $786 million in AUM so
this is not a small, obscure ETF. Yet, it is often overshadowed
by FXI. Remember that China is the world's second-largest economy
and FXI holds just 26 stocks. GXC holds 217 stocks. FXI has no
exposure to China's Google (NASDAQ:
GOOG
), Baidu (NASDAQ:
BIDU
). GXC does.
Over the past five years, one year and year-to-date, GXC has
obliterated FXI in terms of performance. Simply put, the numbers
are not close and clients that knew of this situation would
probably fire their advisors for recommending FXI over GXC.
Just a few days shy of its third birthday, the Guggenheim
China All-Cap ETF (NYSE:
YAO
) has just $51.6 million in AUM. Volume is less than 17,000
shares per day. Arguably, it is those factors that keep some
traders away from this ETF.
Additionally, YAO's name implies the ETF might be heavy on
Chinese mid- and small-caps. In reality, the ETF's top-10
holdings closely resemble what is found in FCHI and FXI, meaning
YAO is large-cap heavy. Not to mention, YAO is home to 187 stocks
and a lower P/E ratio, 9.4, than FXI. Since inception, over the
past year and year-to-date, YAO has topped FXI.
Speaking of small-caps, there is no denying that low market
value Chinese equities have been controversial over the past 12
to 18 months. Shady accounting practices, reverse splits and the
like are fine reasons for anyone to eschew the risks and focus
more on the perceived safety of Chinese large-caps.
For those willing to embrace added risk, ETFs devoted to
Chinese small-caps have also shown a tendency to outperform FXI.
The Guggenheim China Small-Cap ETF (NYSE:
HAO
) has topped FXI year-to-date and since its debut in early
2008.
Reverting back to large-caps, the iShares lineup features
another ETF that has trumped FXI. The iShares MSCI China Index
Fund (NYSE:
MCHI
) debuted in March 2011 and has almost $410 million in AUM,
making it one of the more successful new ETFs to debut last
year.
A case can be made that MCHI
is FXI with a MSCI index
because the two funds share plenty of similarities. However, MCHI
stands out because it holds 142 stocks.
Despite strong average volume of almost 191,000 shares per
day, MCHI is overshadowed by its cousin, FXI. That is odd because
MCHI is up 8.2 percent year-to-date compared to a 4.5 percent
gain for FXI. Neither have been great since MCHI debuted, MCHI is
270 basis points less bad.
Bottom line: FXI will continue to dominate the China ETF
conversation, but if history repeats itself, and it often does in
the financial markets, traders and investors will be better
served with another China ETF.
For more on China ETFs, click
here
.
(c) 2012 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.