iShares FTSE China Index Fund (FCHI)

Published on by on August 18, 2011

FCHI At A Glance
Issuer: iShares
Structure: ETF
Expense Ratio: 0.72%*
Inception Date: 06/24/2008
Largest Holding China Construction Bank**
Weight: 9.8%**
# Of Holdings 115**
AUM: $53.76M*
ADV 6,175*
2010 Gain (Loss): 6.89%
2009 Gain (Loss): 48.49%
2008 Gain (Loss): n/a
*As of 7/22/2011. **As of 7/6/2011

FCHI is an ETF that seeks to invest in large and mid cap companies that are listed on the Hong Kong Stock Exchange. This product has approximately $53 million in assets, and trades hands just over 6,000 times per day. While FCHI provides solid exposure to this emerging economy, it has its fair share of downsides that investors should take into consideration before purchasing this ETF.

Under The Hood

The first thing that investors will notice of is that this fund tracks HK-listed equities; a commonality among Chinese ETFs. A closer inspection of this product’s holdings reveal several issues with allocation and weighting that may make this fund more of a compliment product rather than a building block investment.

At first glance, FCHI’s 115 holdings make it seem like a healthy ETF with strong diversity, but the fund weights its top ten stocks as more than 57% of the portfolio, meaning that just a handful of companies will have a major say in the performance of this ETF. Though the top ten holdings feature numerous bellwether firms in China that may be considered safer options, the fact that they account for so much of this product can lead to skewed results.

Also of concern is the sector breakdown; almost half of FCHI’s portfolio consists of financial stocks, a huge weighting to afford to any one industry. After that, the fund gives significant weight to energy, telecom, and basic materials, failing to provide any kind of substantial glimpse into technology, health care, or utilities. Investors should be weary of this sector bias, as it can have a major impact on returns.

As noted above, many of FCHI’s components are large and mega cap stocks and 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 and allocations to the consumer, health care, and technology companies.

Pros

In terms of advantages, FCHI, a comparable product to the popular FXI, though offers a large range of holdings, in an effort to spread its exposure across a wide variety of Chinese firms, something its competitor cannot say.

It is important to consider that all of the component companies in the underlying index trade on the Hong Kong Stock Exchange, resulting in limited “pure play” exposure to smaller companies in the Chinese economy (as well as exposure to the Chinese currency).

Cons

Along with several major concentration flaws, including a top heavy holdings list as well as a significant bias towards financials, FCHI may not be the best option for traders looking for high liquidity. This fund does not have the high trading volume or AUM that FXI can boast, which will likely eliminate as a prospect for anyone looking to actively move in and out of positions.

Also note that this fund is on the upper end of expenses, charging 0.72%, while there are other products out there, like GXC, which track a similar market but have much cheaper fees. Finally, investors should take note that this fund has a tilt towards mega and large cap companies, which may prevent it from raking in the “pure-play” Chinese exposure that other small cap products see.

Final Verdict

Overall, FCHI may be strong component to a portfolio, but should not be thought of as a stand-alone product for China exposure as it comes with too many flaws. Those seeking a more liquid fund may want to look at FXI, while those aiming to minimize expenses would be better served with GXC.

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