First Trust ISE Chindia ETF (FNI)
|FNI At A Glance|
|Largest Holding||Baidu, Inc.**|
|# Of Holdings||50**|
|2010 Gain (Loss):||18.17%|
|2009 Gain (Loss):||82.55%|
|2008 Gain (Loss):||-57.06%|
|*As of 7/22/2011. **As of 7/6/2011|
FNI is an interesting product that gives investors a mix between both China and India exposure. This ETF has close to $150 million in assets and is fairly liquid with over 42,000 shares changing hands every day. While this fund may be ideal for investors seeking broad exposure to the biggest economies in Asia, it’s by no means a precise tool for gaining targeted exposure and its “one-size fits all” approach has several potential drawbacks.
Under The Hood
This ETF may appeal to investors in certain circumstances; its broad exposure across the Chinese and Indian economies is certainly practical for those in need of a one-stop solution for accessing Asia’s emerging markets. However, the underlying holdings of this portfolio limit its usefulness to those seeking more precise exposure within the booming Chinese economy.
At first glance FNI appears to be well diversified given its broad scope across multiple economies. The fund, however, has only 50 holdings in total. Moreover, FNI allocates close to two-thirds of its assets in the top 10 companies alone, resulting in an extremely top-heavy portfolio. This represents only a very small portion of the Chinese equity market, and results in some significant concentrations in individual stocks that greatly increase company-specific risk. By comparison, YAO provides much broader exposure through a basket of nearly 200 stocks.
Investors looking to fine tune international exposure may prefer to build these positions piecemeal, as opposed to relying on FNI to deliver diversified exposure.
In terms of allocations by sector, FNI is heavily tilted towards technology holdings with financial services claiming the second biggest chunk. Consumer cyclical, energy, and communication services also receive adequate allocations, while more promising corners of the Chinese economy including the real estate and health care sector receive minimal weightings.
It should also be noted that most of FNI’s components are large and mega cap stocks, and that the Chinese government holds positions in many of the component companies. For investors looking to tap into the true growth potential of China, it’s important to include smaller companies across more sectors as they are more “pure plays” on the local economy.
While most China funds are biased towards large-cap financial and energy holdings, FNI actually offers the advantage of being overweight in the technology sector. One of FNI’s other advantages is the fund’s fairly cheap expense fee considering it offers exposure to both China and India.
This fund is very top-heavy as mentioned earlier which results in unfocused country exposure that doesn’t do a good job of playing either BRIC member. Although FNI is optionable, the fund has fairly low liquidity when compared to more popular tools like FXI.
Investors who desire a one-size fits all approach in gaining exposure to Asia’s biggest economies should certainly consider FNI. But for anyone looking to a build a long-term portfolio with either deep or precise exposure, this ETF is probably not the best option available. FNI lacks a broad portfolio of holdings and its top-heavy construction diminishes diversification benefits in addition to introducing sector biases that underweight promising corners of the Chinese economy.
FNI can be a useful tool for those who believe that China and India are underweighted in broad-based emerging markets funds such as EEM; this ETF can help to beef up the allocations to these promising economies.