Make no mistake about it, China is back on track.
The nation suffered through weak stretch in 2012, but the
economic outlook appears brighter for this year and beyond.
Growth is expected to
be at 8%
for the calendar year as exports pick up thanks to a solid U.S.
market, and a much more stable situation in China's biggest
trading partner, the EU.
This trend has once again rekindled American investor interest
in the world's second biggest economy, causing many to tilt
portfolios to stocks, or funds, that have high levels of exposure
to the nation.
How to Buy China
Investors can access China directly via a few companies
already. Some Chinese mega caps are already listed on American
exchanges such as
China Mobile (
China Petroleum & Chemical (
Meanwhile, plenty of American firms are largely driven by
their Chinese growth prospects, so these could be considered
'tangential' plays on the Chinese economy, such as
Yum Brands (
. But, in my opinion, both of these strategies pale in comparison
to an ETF approach for the China market (see
China ETF Investing 101
That is because an ETF allows investors to buy up shares in a
variety of Chinese companies in a single ticker, many of which
wouldn't be investable by Americans outside of the fund world.
These funds also help to reduce on the risk of a single blowup in
the Chinese market, as the diversification benefits inherent in
helps to cut down on the pain from company specific issues.
Furthermore, ETFs usually offer up decent liquidity, something
that may not be there with some Chinese ADRs. This can be very
important in the fast-moving Chinese market, as the country can
still see large bouts of volatility in short time periods.
Usually, when investors think of 'China ETFs' the one that
comes to mind is the
iShares FTSE China 25 Index Fund (
. This product is easily the most popular and well-known in the
space, as it sees average volume of about 17 million shares a day
with assets of over $9 billion.
The fund is by far the oldest China ETF on the market, having
made its debut in 2004. However, while the product might have
impressive volume levels and widespread investor interest, it
makes many ETF analysts like myself cringe.
Why FXI is a Weak Choice
While the product has done a great service in opening up
China, and getting the nation into many investor portfolios, it
has outlived its usefulness. There are plenty of better choices
out there for most investors, and for a variety of reasons (see
The Key to International ETF Investing
First, investors should note that despite having an enormous
asset base, FXI is actually one of the more expensive China ETFs
on the market today. The product charges 72 basis points a year
in fees even though it holds large cap stocks, the same fee that
charges although this China fund focuses on harder-to-obtain
local A-Shares and swaps for its exposure.
If that wasn't enough, the product is heavily concentrated
into a few sectors, namely financials and energy. In fact, of the
limited 25 stock portfolio, over 50% goes to financials, while
another 20% goes to the oil and gas sector (read
Do ETFs Suggest that the China Panic is Over?
Telecom, basic materials, and real estate round out the rest
of the fund, meaning that a number of key sectors receive no
weight at all in the product. Think about that for a second. FXI
offers nothing to either consumer sector, health care, utilities,
or industrials, putting a full 95% of assets into large cap
While this strategy certainly promotes safety, one can easily
argue that it misses out on what many investors believe will be
the more dynamic corners of the Chinese economy going forward. It
also zeroes in on China's biggest state-owned firms which
probably don't have a whole lot of growth left anyway, meaning
that investors may not tap into the real China growth story with
Plenty of Better Choices
Fortunately, the explosion of ETFs over the past few years has
given investors a number of other options to use in the China ETF
world. Many of these products address the severe issues in FXI
highlighted above, and thus could be better picks for China ETF
investors, including the following three funds:
SPDR S&P China ETF (
This ETF is the second most popular China fund on the market
today with over $1.2 billion in AUM. The product has solid volume
of about 200,000 shares a day so liquidity should be ample in
GXC is also a bit cheaper than FXI, charging investors just 59
basis points a year in fees. This makes it one of the lowest-cost
choices in the space, while still having great liquidity (read
Three Excellent Dividend ETFs for Safety and
Its portfolio consists of a robust 200 stocks, stretching
across all the industries. Financials and energy do make up the
top two in this product, but technology (12%) and industrials
(9%) round out the top four spots.
Guggenheim China Small Cap ETF (
For a focus on smaller firms in China, HAO could be the
ticket. This product tracks the AlphaShares China Small Cap
Index, which charges investors 70 basis points a year in
Assets under management for this product are approaching $400
million, while the average daily volume is a solid 200,000 shares
a day as well. This suggests that despite the focus on small
caps, the fund should see high levels of liquidity for most
The ETF holds over 240 firms and it doesn't put more than 2%
in any single security, so company specific risk is pretty much
non-existent. The sector exposure is pretty solid as well, as
energy and financials account for just 5% of total assets.
Instead, industrials, consumer cyclical, and basic materials
make up half of the fund, giving this product a very different
tilt. Investors should note, however, that the mid and small cap
focus of HAO does make it a bit volatile, so risk averse
investors should be cautious with this product (See
4 Best ETF Strategies For 2013
Global X China Consumer ETF (
For those seeking a pretty big departure from what is in FXI,
this Global X fund could be an interesting alternative. The
product only buys Chinese consumer stocks, making it a great
pairing for an FXI investment, or a targeted play on one of
China's key growth segments.
This is done by focusing on the S-BOX China Consumer Index, a
benchmark that has about 40 stocks in its basket. It is tilted
towards cyclical consumer stocks (48%), while mid caps dominate
from a cap perspective.
In terms of sectors, food products take up roughly 18%, while
automotive, and specialty retail account for the rest of the top
three. Assets are relatively well spread out, as no one company
makes up more than 6.5% of assets, although automotive and food
firms do dominate much of the top ten holdings.
The approach has been relatively popular with investors, as
the ETF has over $200 million in assets and average volume above
130,000 shares a day. The total cost is pretty competitive too,
coming in at 65 basis points a year, which is surprising given
the targeted exposure in the fund (read
Is It Time to Buy China ETFs?
The Bottom Line
Why anyone is still holding FXI is beyond me. The product is
overly concentrated, expensive, and has no holdings in some of
the country's key growth sectors. The only saving grace of the
ETF is that it is very liquid, so maybe it can be argued to be a
good pick for short-term traders.
Anyone else though would be better off looking at some of the
aforementioned ETFs instead. Not only are they cheaper, but their
exposure seems poised to make them better picks for most
investors over the long haul, which is probably what you should
be focused on when investing in China ETFs anyway.
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GLBL-X CHIN CON (CHIQ): ETF Research Reports
CHINA MOBLE-ADR (CHL): Free Stock Analysis
ISHARS-FT CH25 (FXI): ETF Research Reports
SPDR-SP CHINA (GXC): ETF Research Reports
GUGG-CHINA SC (HAO): ETF Research Reports
CHINA PETRO&CHM (SNP): Free Stock Analysis
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