Why You Should Sell FXI, Buy GXC

by on May 14, 2012 | ETFs Mentioned:

Interest in emerging market investments have been surging in recent years, as many have turned to these developing economies for growth that can be found nowhere else in the world. While there are plenty of nations to choose from, most investors tend to stick to the BRIC nations, as these have been deemed to be the most promising options available. Of those four nations, China seems to have taken a special place in investors’ portfolio as the world’s largest country by population has a lot to offer [see also Five ETFs For A China Bank Bubble].

With over 1 billion citizens and a rapidly expanding economy, it should come as no surprise to see a wealth of ETF options dedicated to China. According to our free ETF Country Exposure Tool, there are currently 250 funds that invest some part of their assets in the emerging economy. Of those options, however, one ETF has garnered a significant amount of attention.

The FTSE China 25 Index Fund (FXI) is home to nearly $6 billion in total assets and has been trading since 2004. The fund features an average daily volume of 18 million and is by far the largest ETF dedicated to China, but that does not mean it is the best. Investors looking to get the most for the money should take a look at another China fund, the SPDR S&P China ETF (GXC) [see also 12 High-Yielding Commodities For 2012].

Head-to-Head

Let’s begin with FXI; the fund charges 72 basis points for investment and has just 27 holdings. Of those 27, the top 10 holdings account for nearly two-thirds of the entire fund, a poor diversification by ETF standards. From a sector standpoint, FXI grants more than half of its exposure to financials and is made up almost exclusively of giant cap firms. While this may not be a problem for some, having only giant cap firms (with a few large cap holdings) does not make for a compelling diversification.

Moving to GXC, the fund, which charges just 0.59%, has been around since 2007 and has just over $900 million in assets. As far as trading volume is concerned, the fund trades just 130,000 making it far less liquid than FXI. But digging deeper into the fund reveals a holdings base of over 175 companies and less than half of assets dedicated to the top ten. GXC features a better spread across market segments and also is home to companies of all sizes, not just giant caps [see also When Bigger Isn’t Better: Profiling ETF Alternatives To DJP, FXI, GLD].

While all of that sounds good on the surface, investors typically care about one thing; performance. If GXC did not set itself apart by its far superior diversity and cost effectiveness, its performance will make you re-think your FXI allocation. GXC has outdone its larger competitor every year since 2009 (and even thus far in 2012) as evidenced by the chart below [see also BRIC ETFs And Missed Opportunity].

 

Still, one burning question remains, if GXC offers so many advantages over FXI, why is it so much less popular. One of the main reasons for this discrepancy is the first mover advantage that fell on FXI, as the ETF was introduced a full three years prior to GXC. Typically, once investors are comfortable with their current exposure, they are reluctant to shift around holdings, incur capital gains, pay commission fees, etc. GXC came into the market as an underdog and remains in that position today, but this ETF demands a closer look from any investor looking to get broad-based exposure to China [see our Asia-Centric ETFdb Portfolio].

Follow me on Twitter @JaredCummans

Disclosure: No positions at time of writing.