With the Chinese economy continuing to expand at an impressive rate, many investors are looking to allocate greater percentages of their portfolios to this increasingly important market. More and more investors are turning to ETFs as a means of accessing Chinese equities. By far the most popular fund in the China Equities ETFdb Category is the iShares FTSE/Xinhua China 25 Index Fund (FXI), which has amassed close to $8 billion in assets and has an average trading volume of nearly 25 million shares.
Despite its tremendous popularity, there are some potential drawbacks to relying primarily on FXI for China exposure. The fund offers cheap and efficient exposure to the Chinese market, but the sector allocations may result in unbalanced exposure to various parts of the economy. FXI is heavily weighted towards financials, with about 45% of the securities going to Chinese financial firms. Moreover, consumer products and services, a sector some see as a primary driver of future growth, account for less than 2% of holdings.
For investors looking for exposure to the largest and most liquid Chinese stocks and a tilt towards financials and telecoms, FXI makes a lot of sense. But for investors looking for more balanced exposure to China, there may be some more appealing options. In recent years a number of ETF issuers have introduced a number of China products that allow investors to gain increasingly targeted exposure that goes beyond China Mobile, Bank of China, and other mega-cap (and often government-owned) stocks.
Below, we highlight three such ETFs that may offer a compelling choice to investors looking to beef up their China exposure (see all the ETFs in the China Equity ETFdb Category for a complete list of options).
PowerShares Golden Dragon Halter USX China Portfolio (PGJ)
PGJ offers investors large and mega cap exposure much like FXI. However, this fund is much more diversified across various sectors of the economy, only allocating 8% to financials. PGJ gives considerably larger weights to information technology and energy, both of which make up roughly one-fifth of the total assets of the fund. Individual allocations include huge Chinese firms such as China Mobile (7.9%), PetroChina (7.1%), Baidu (6.0%), and China Life Insurance (6.0%). PGJ charges an expense ratio of 0.60%, and is up about 4% so far this year.
Claymore/AlphaShares China Small Cap Index ETF (HAO)
Unlike most other funds that focus on China, HAO focuses primarily on small cap securities; its average market capitalization is just under $1 billion. In fact, a float-adjusted capitalization maximum of $1.5 billion and a minimum of $200 million are used for initial portfolio construction and eligibility (a float-adjusted capitalization of less than $1.75 billion and greater than $150 million are required for ongoing inclusion in the underlying index). Some believe that small-cap securities offer a better picture of a national economy since they tend to focus on domestic markets, while mega caps often generate sales and earnings from international markets. HAO’s nearly 160 securities contain large allocations to industrials (28%) and materials (16%), with just under 13% to financials. The fund charges an expense ratio of 0.70% and is up almost 7% this year (see HAO Surges Ahead).
China Consumer ETF (CHIQ)
CHIQ focuses on the rapidly expanding Chinese consumer sector, a growth market that some believe will drive the Chinese market for years to come. Currently, the average Chinese savings rate is 25% of disposable income, suggesting that producers and retailers have a huge market to tap into in the near future. The fund consists of 40 stocks that are focused on the consumer industry in China. Currently, large allocations include retail (comprising 28% of assets), food stocks (23%), consumer services (21%), and automobiles (12%). The fund has an expense ratio of 0.65% and it is up about 7% this year.
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Disclosure: No positions at time of writing.
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