Last week, I called out 10 overlooked
that I thought deserved more assets. This week, I want to focus on
a couple of Asian ETF giants that I think are among some of the
most overrated funds in the industry.
The two ETFs I'm referring to are the iShares FTSE China 25
Index Fund (NYSEArca:FXI) and the iShares MSCI Japan Index Fund
(NYSEArca:EWJ). Thus far, these two ETFs have become the de-facto
ETF plays for investors wanting exposure to the world's second- and
Not surprisingly, both of these funds were first-movers into
their respective pockets. Today, many investors continue to pile
assets into them based on their popularity, but it is time to
reexamine whether they're really the best of the bunch, or simply
Let's first start with the $7.9 billion FXI, because this fund
probably tops my list of all overrated ETFs.
I understand why there was so much excitement over FXI when it
launched in 2004. It was, after all, the first China focused ETF
available to U.S. investors, but that was eight years ago.
Chinese markets have come a long way since 2004, and so has the
China ETF landscape. Since then, more than 20 China ETFs have
launched, most of which provide broader exposure to the Chinese
equity markets than does FXI.
The biggest issue with FXI is one of scope. It's strictly a
large-cap fund that holds only 25 names traded in Hong Kong, most
of which are state-owned financial, energy and telecom
But the real roadblock here is that it's only eligible to hold
H-shares and red chips.
This means FXI misses out on Chinese mega-cap P-chips, like Hong
Kong-listed Tencent Holdings, and U.S.-listed N-shares like Baidu
(although starting March 2013, FXI will be eligible to hold P-chips
due to a recent FTSE reclassification of P-chips).
I do want to make it clear that FXI is not a bad fund.
It does what it's supposed to do-that is, track the FTSE China
25 Index. For institutions concerned about liquidity, FXI is also a
no-brainer-the fund is a liquidity beast, trading on average,
almost $600 million a day and over 100 creation units.
But for retail investors looking for the broadest exposure to
Chinese equities, a fund like the SPDR S&P China ETF
(NYSEArca:GXC) makes more sense. While GXC has over 200 holdings
across all cap-sizes, the real key here is that it's eligible to
hold all investable Chinese shares.
To me, GXC is the current the SPDR S&P 500 ETF
(NYSEArca:SPY) of China ETFs. Meanwhile, I'm not even sure I would
consider FXI to be the equivalent of the SPDR Dow Jones Industrial
Average Trust (NYSEArca:DIA).
In the coming years, as China continues to open its markets, I
expect newer and even more comprehensive China ETFs to launch from
various issuers. If there's one market out there that investors
should keep an open mind on, it's China.
So, investors should stay tuned.
Moving on from China, I want to focus on Japan and EWJ.
Now that the yen is getting pummeled and the Nikkei is flying,
it seems Japan has gone from being the most hated dog to the
coolest kid in the investment world.
In just a couple of months, investors have suddenly turned
bullish on Japan in a hurry on expectations that the new prime
minister Abe's aggressive policies to battle deflation will
lead to more yen weakness, and spur a rally in Japanese stocks.
To that point, it seems U.S. investors are now really catching
on to the benefits of being currency-hedged in the current
environment in Japan.
Since the beginning of December, the WisdomTree Japan Hedged
Equity Fund (NYSEArca:DXJ) has had inflows of over $320 million,
helping it catapult over the $1 billion mark in assets under
While EWJ had inflows of around $110 million during that same
time, I'm still baffled that EWJ remains a $4.7 billion fund,
especially after the yen was hovering in the 78-80 yen/dollar range
for the five months prior to the latest rout that began in
Without a currency hedge, investors in EWJ are taking a direct
hit as the yen gets pummeled. As an example, let's assume that Abe
is successful in his currency-weakening agenda and the yen weakens
to 100 yen/dollar-which would be a 17 percent drop from current
Now, even if Japanese equities didn't budge over the same
period, that would still be a 17 percent loss in returns for
By the way, in this example, I'm assuming all its holdings are
priced and traded in yen and, as of Dec. 21, 2012, all EWJ's
holdings were traded on the Tokyo Stock Exchange, Osaka Stock
Exchange, or the Jasdaq.
Again, EWJ is not a bad fund. It does what it's supposed to do,
which is to track the non-currency hedged MSCI Japan Index. And of
course, the opposite is true here as well. If the yen surges, EWJ
would be fully exposed to those yen gains.
But rather than speculate whether the yen will continue to
weaken or not, a better question to ask is:Does anyone think that
the Nikkei and Japanese equities will continue to perform well if
the yen surges back to 75 yen/dollar and beyond?
If you really think that Japan becomes the new cool for 2013
based on the notion that the yen will continue its depreciation,
then EWJ still looks overrated compared to DXJ.
At the time this article was written, the author held a long
position in DXJ. Contact Dennis Hudachek at
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