From an investment perspective, the U.S. has historically been the dog and the rest of the world the tail. Global equity markets have taken their cues from Wall Street, and economic developments in the U.S have rippled throughout the world. The U.S. remains a very important part of the global economy, but the last few years have seen a meteoric rise of emerging markets, the new drivers of global economic growth. China in particular has become a critical economy to watch, as evidenced by the intense focus of investors on the government’s plans for unwinding the stimulus plan.
While both the U.S. and Chinese economies offer numerous investment options, most investors tend to gravitate towards large firms with established track records. Two of the most popular ways to access these markets are with the Dow Jones Industrial Average ETF (DIA) and iShares FTSE/Xinhua China 25 Index Fund (FXI) representing the “blue chips” and “red chips” respectively.
These funds both represent the largest and most prominent companies of each country. Both funds focus on mega-cap firms, but they maintain very different risk and return profiles in addition to the obvious geographic differences. Although obviously not directly comparable, it is interesting to see how the major companies of each country stack up against each other.
DIA follows the Dow Jones Industrial Average, a price-weighted index of 30 “blue-chip” U.S. stocks. It is the oldest continuing U.S. market index. The index tracks firms that trade on either the New York Stock Exchange or the Nasdaq. The DJIA was invented by Charles Dow in 1896. Today, it is arguably the most widely followed index in the world.
FXI follows the FTSE/Xinhua China 25 Index, which tracks the largest companies in the Chinese equity market. The firms in this index represent the “red chips” of the China market and are traded and listed on the Stock Exchange of Hong Kong. Individual constituent weights are capped at 10% to avoid over-concentration in any one stock and securities are free-float weighted to ensure that only the investable opportunity set is included within the index and are liquidity screened to ensure that the index is tradable (PDF).
Despite the reliance of the Chinese economy on manufacturing and exports, nearly 45% of FXI is devoted to financial firms. Other heavily weighted sectors include telecommunications (17.5%) and the oil & gas industry (11.9%). China Mobile takes up the number one individual spot with 9.75% of total assets. The next four highest-weighted securities are all banks, combining to take up about 31% of the fund.
DIA is much more evenly distributed, allocating just 10% to financial firms. The largest sectors for DIA are industrials and information technology which combine to make up 40% of the fund’s assets. For individual holdings, computer giant IBM makes up nearly 9% with 3M and Chevron in second and third making up 5.75% and 5.25% respectively.
Performance and Fees
Although FXI greatly outperformed DIA before the bubble burst, it has not been so fortunate as of late. FXI has posted a loss of about 2% this year compared to a gain of nearly 5% for DIA. It’s also worth noting that DIA charges an expense ratio of 0.16%, roughly one-fifth of FXI’s 0.74% ratio. For dividend minded investors, DIA offers a yield of 2.89% while FXI pays a 30 Day SEC Yield of 0.50%.
For investors seeking cheap exposure to household names, DIA is a compelling choice. The fund provides easy access to the ‘blue chips’ while paying higher dividends and offering more balanced exposure than its Chinese counterpart. FXI on the other hand, is probably more appropriate for investors seeking higher growth potential and those who are seeking high levels of exposure to international financial securities.
Disclosure: No positions at time of writing.