What’s Driving The Chindia ETF?

by on January 18, 2010 | ETFs Mentioned:

The mega economies of China and India are once again growing at a torrid pace, with both projected to expand by at least 9% this year. Both countries’ PMI readings are now in the mid 50s, suggesting a period of expansion in the manufacturing industry as well. With much of the developed world still waiting for meaningful economic expansion to materialize, many investors looking for growth opportunities have turned to these two countries, which have nearly 40% of the world’s population, to act as global growth engines and pull the rest of the world out of the recession. But while many are pinning hopes of a sustained recovery on the two giants, opinions are mixed on which country offers investors the best chance for long term gains.

Some of the most respected minds in the finance industry are sharply divided on the prospects of these two juggernauts. Although it may soon overtake Japan as the world’s second-largest economy, some argue that China should be avoided in favor of India. “If I had to pick one country for the next 30 to 40 years, it’d be India. It wouldn’t be China,” says Harry Dent. “Their demographics are going to work against them. China’s policy of one child per family, which started in the early 1970s, will begin to catch up with them between 2015 and 2020. Someone said China is going to get old before they get rich, and we agree with that”. Dent also cites the more favorable demographic situation in India as a positive and a possible reason for investment in the country.

Others believe that India is a poor choice and should be avoided in favor of the more dynamic China. Legendary investor Jim Rogers recently shared his preference for China:

“Indians have the worst bureaucracy in the world. India learned bureaucracy from the British. Indian bureaucracy has remained stagnant. Just stagnant. They do what they think only. There is no proper education, no infrastructure in India. India is an amazing country. But as a place for investment? Oh, no, I would think twice. Even Indians who have been doing great business elsewhere in the world, and when they go back to India to do business, it has not been a good experience for them. Many of them get out of the business and go back to other countries to do business”

Rogers went on to detail the general superiority of the Chinese infrastructure and why this factor could help to power the economy further ahead.

“Chindia” ETF Options

For ETF investors, there are a number of options for investing in both China and India. For those looking for one-stop exposure to both, there is also fund that offers 50/50 access to companies domiciled in China and India: the First Trust ISE Chindia Fund (FNI).

Securities are selected for inclusion in the index underlying FNI by a series of screening measures. First, the fund establishes the total population of companies that are domiciled in either India or China and whose shares or ADRs are listed in the U.S. Companies are then removed which do not meet the fund’s requirements for minimum market capitalization and trading volume. The remaining stocks are ranked by their liquidity score, which is established by ranking all eligible stocks separately by market cap and three month average daily dollar volume.  The ranks are then summed to obtain each stock’s liquidity score and the 25 highest ranked stocks from each country are then included in the fund.

The fund allocates its assets by first investing in the top three ranked stocks in each country at a weighting at 7% each and the next three in each country at 4% each. The next three (i.e., stocks ranked seventh through ninth) in each country are weighted at 2% each and the remaining stocks are equally weighted.  The index is then rebalanced on a semi-annual basis.

FNI has a tilt towards large cap firms with an average market capitalization of $16.8 billion. The fund has large weightings to information technology (27.7%) and financials (21.7%) in addition to weightings in the energy (12.5%) and telecommunication sectors (11.4%). FNI, which has an expense ratio of 0.60%, has performed very well over the past 52 weeks, up just over 90%.


FNI obviously isn’t the only way to gain exposure to both China and India. Most emerging markets funds and all BRIC ETFs have significant allocations to these countries. Moreover, a handful of China ETFs (including market cap and sector-specific funds) and multiple India funds allow investors to determine a custom weighting methodology to these economies with little effort.

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Disclosure: No positions at time of writing.