Cure For The Common China ETF?

by on September 19, 2012 | ETFs Mentioned:

 WisdomTree, the issuer behind a number of dividend-weighted ETFs, announced today the launch of the first ETF to specifically target dividend-paying Chinese stocks. The new WisdomTree China ex-Financials Index Fund (CHXF) will seek to replicate an index that measures the performance of dividend paying Chinese stocks outside the financial sector, offering a unique pathway into one of the fastest growing global economies. Moreover, the manner in which CHXF is constructed–specifically, the focus on dividends and the exclusion of financial stocks–will make it quite different from the other China ETFs on the market [see also How To Pick The Right ETF Every Time]. 

Under The Hood

The underlying index consists of the ten largest stocks in each sector except financials, chosen from the universe of dividend paying Chinese stocks. The resulting portfolio has its largest allocation to the energy sector, thanks to substantial weights in companies such as CNOOC and PetroChina. After energy, which represents about a quarter of the portfolio, CHXF makes allocations to the materials (15%) and telecom (14%) industries [see also Financials Free ETFdb Portfolio]. 

In total, the new China ETF holds about 64 individual stocks, with the largest individual weighting going to China mobile at about 8% of the portfolio. Nearly 60% of the portfolio is dedicated to large cap stocks, with about a third in mid caps. Small cap stocks make up about 9% of total holdings.  

The underlying index has a dividend yield of about 2.9%. The index has a price-to-earnings ratio of about 11.5x and a price-to-cash flow of about 6.8x. 

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CHXF vs. FXI

CHXF is the 15th ETF in the China Equities ETFdb Category, joining several other products that target this rapidly expanding emerging market. Yet it is in a way the first of its kind thanks to the focus on dividend paying stocks and the exclusion of the financial sector from the underlying portfolio [try our Free Head-To-Head ETF Comparison].

The unique elements of the new fund are perhaps best illustrated by comparing it to the most popular China ETF, the iShares FTSE China 25 Index Fund (FXI). With about $4.5 billion in assets, FXI is widely used to establish both long-term and short-term exposure to Chinese stocks. And while it boasts impressive liquidity, there are some potential drawbacks in the way the portfolio is constructed.

FXI has a meaningful bias towards financials; this sector makes up more than half of the underlying portfolio, which features big positions in stocks like China Construction Bank (8%), Industrial and Commercial Bank of China (8%), Bank of China (6%), and China Life Insurance (5%). FXI has little or no exposure to the consumer sector, tech stocks, and utilities companies [see also Ex-Financials ETFs For Cautious Bulls]. 

Other China ETFs also feature large allocations to the financial sector, though not as significant as that found in FXI. Financial stocks make up about 28% of the S&P China ETF (GXC) and nearly a third of the iShares MSCI China Index Fund (MCHI). By avoiding this sector entirely, the new WisdomTree ETF will offer a very different portfolio compared to other products available to U.S. investors.

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Disclosure: No positions at time of writing.