iShares, the largest U.S. ETF issuer by total assets, added another ETF offering exposure to Chinese equities to its product lineup this week. The MSCI China Index Fund (MCHI) will seek to replicate the MSCI China Index, a benchmark that includes about 140 Chinese stocks. The index is designed to measure the performance of the top 85% of equity securities by market capitalization in the Chinese market. “The new iShares MSCI China Index Fund provides clients access to one of the fastest growing economies in the world,” said Noel Archard, Head of US Product at iShares at BlackRock. “The fund further complements our single country product suite, which has seen significant activity over the past few months as investors increasingly look to single country funds to express nuanced views on global markets.”
MCHI is the 40th country-specific offering from iShares, joining products offering exposure to both developed and emerging markets. The new ETF becomes the fourth iShares product offering exposure to China, joining the ultra-popular FTSE China 25 Index Fund (FXI), iShares FTSE China Index Fund (FCHI) and iShares MSCI China Small Cap Index Fund (ECNS).
FXI is the largest ETF in the China Equities ETFdb Category, which now consists of 19 ETFs with aggregate assets in excess of $10 billion. There will be some overlap between the new MCHI and FXI; major components of each include China Mobile, China Construction Bank, Industrial and Commercial Bank of China, CNOOC, Bank of China, and Petro China. But MCHI will offer greater depth of holdings than FXI, which has only 25 individual holdings. By extending the portfolio, MCHI offers exposure to some mid cap Chinese equities; FXI focuses almost exclusively on mega cap stocks.
Under The Hood
The largest sector allocations in MCHI will go towards financials and energy; at the end of February these sector made up 37% and 18% of the underlying index, respectively. But the fund will be more balanced than FXI in terms of sector exposure, including corners of the market such as technology, consumer goods, utilities, and health care that aren’t represented at all in the other China ETF.
Many of the “first generation” of international equity ETFs are dominated by mega cap equities, but innovation in the ETF industry in recent years has presented investors with more and more options for gaining exposure to small cap and mid cap stocks. Because mega caps are often multi-national firms that can generate revenues in a variety of different regions, they might not be impacted as directly by changes in local consumption patterns as smaller companies. There have historically been significant performance deltas between large cap and small cap ETFs, highlighting the distinction in these types of products [see For ETF Investors, The Details Matter].
MCHI will charge an expense ratio of 0.61%, below the average of 0.67% for the ETFdb Category.
Disclosure: No positions at time of writing.