China ETFs: Closer Look Under The Hood

by on January 21, 2013 | ETFs Mentioned:

Over the past several years China has become an increasingly important component of U.S. investor portfolios, as it has become increasingly clear that the Asian economy is positioned to be the primary driver of global GDP growth for the foreseeable future. Those looking for exposure to the massive emerging market have embraced a number of ETFs that target the country; there are more than a dozen China ETFs that have aggregate assets of more than $15 billion (in addition to billions more in broad-based emerging market ETFs).

While the various China ETFs out there may be generally influenced by the same macroeconomic factors, they are far from identical. In fact, the differences from one China ETF to the next can be significant, and have a meaningful impact on performance [see 101 ETF Lessons Every Financial Advisor Should Learn].

Depth, Financial Allocation Play Big Roles

Most notably, not all China ETFs are equally “deep” in terms of the number of total stocks they hold. FXI, which is by far the largest with almost $9 billion in assets, has only about 25 individual holdings. Others, such as HAO, have more than 200 individual stocks in their portfolio [try our Free ETF Head-To-Head Comparison Tool]. 

It’s also worth noting that the allocation to the financial sector is all over the board; FXI has more than half of its assets in Chinese banks, while other China ETFs make only minor allocations to the financial sector. This characteristic will obviously have a big impact on the risk / return profiles of these funds, and can impact the composition of an overall portfolio materially [see our Asia-Centric ETFdb Portfolio]. 

The table below compares the financial allocation and number of total holdings among five popular China ETFs, revealing significant differences between them:

  • iShares FTSE China 25 Index Fund (FXI, B-)
  • SPDR S&P China ETF (GXC, A)
  • iShares MSCI China Index Fund (MCHI, A-)
  • Golden Dragon Halter USX China Portfolio (PGJ, B)
  • China Small Cap ETF (HAO, B+)

Of course, there’s no universally right choice from the above ETFs. For some investors, a financials-heavy ETF makes sense; for others, a more balanced and deeper portfolio might be the way to go.

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Disclosure: No positions at time of writing.