China has become a very popular destination for many investors; the tremendous long-term growth potential, favorable demographic trends, and growing global presence make it hard to ignore when building a long-term portfolio. ETFs can be a cost-efficient way to access this market, but there are some potential drawbacks as well. Many of the most popular China ETFs have a large number of their assets allocated to Chinese banks, this includes the most heavily traded FTSE China 25 Index Fund (FXI), which devotes more than half of its portfolio to financial institutions. This isn’t to say that Chinese banks are not a good investment, but ETFs dominated by them will only give investors a small glance into China’s potential [see also Five ETFs For A China Bank Bubble].
Below we highlight three ETFs that offer pure play exposure to China, but have relatively small allocations to the financial sector.
China Dividend ex-Financials ETF (CHXF)
This WisdomTree fund focuses on the 10 highest dividend-yielding companies in every sector, excluding financials and companies with under a billion dollars in capital. The decision to exclude financials leads to a tilt towards energy, which makes up a quarter of the portfolio, but also substantial holdings in consumer staples, industrials, materials, and telecom. About 25% of the portfolio is made up of companies from Hong Kong, which has been a very important growth market within the China umbrella. This well diversified portfolio was introduced in September of this year, so it is hard to tell if it will keep its promise of high dividends, but its positive performance out of the gates most certainly shows promise [see also Cure For The Common China ETF?].
China Small Cap ETF (HAO)
By bringing the focus away from giant corporations and banks that still may have a government hand in their operations, this Guggenheim fund looks for companies with a market cap below $1.5 billion, which are mostly considered mid caps. More than 90% of the 225 companies included in the fund are based in mainland China and focus on industrials, consumer cyclical, real estate, and basic materials, although there is also very minimal allocation to financial services. Even though markets in China appear to have slowed their growth over the last year, this ETF still boasts a positive return year-to-date that could interest disenchanted investors [ETFdb Pro members can see the BRIC-Or-Bust ETFdb Portfolio ; sign up for a free 7-day trial for full access].
MSCI China Small Cap Index Fund (ECNS)
This iShares ETF also focuses on smaller companies operating in mainland China, but it goes smaller than HAO, including no large caps; instead, this fund focuses purely on medium, small and micro cap size companies. With a slight tilt to industrials, this fund features a well-rounded portfolio overall with no particularly heavy concentrations. Other sectors represented in ECNS are consumer cyclical, technology, basic materials, and real estate with even a few holdings in financial services. This fund is also enjoying positive YTD returns along with a 30-day SEC yield of 3.03%, offering a way to enhance current income without giving up growth potential [see also Ex-Financials ETFs For Cautious Bulls].
Disclosure: No positions at time of writing.