iShares MSCI China Index Fund (MCHI)
|MCHI At A Glance|
|Largest Holding||China Mobile**|
|# Of Holdings||147**|
|2010 Gain (Loss):||n/a|
|2009 Gain (Loss):||n/a|
|2008 Gain (Loss):||n/a|
|*As of 7/22/2011. **As of 7/6/2011|
MCHI is a fairly new product offering exposure to large cap Chinese equities. The fund is gaining popularity amongst investors as it offers very similar exposure to YAO but charges a lower annual fee. But MCHI is not without its flaws; for investors seeking long-term China exposure, there may be some better options available or complementary positions to round out exposure.
Under The Hood
MCHI gives investors access to a basket of nearly 150 holdings in total, providing greater depth of exposure than many other China ETFs. As mentioned earlier, MCHI closely resembles YAO and likewise the fund maintains a broader sector representation that many other China ETFs. However, MCHI charges a smaller expense fee, making this fund an appealing option for cost-conscious investors looking to add China exposure to their portfolios.
Like YAO, this fund has some elements that may be less than optimal; there is a fair amount of concentration among the largest components of the index; ten stocks account for about 50% of total assets, resulting in a top-heavy design which increases company-specific risk and diminishes the diversification benefits associated with having a broad portfolio.
In terms of sector allocation, MCHI’s holdings are biased towards financial service companies as this ETF dedicates over one third of total assets to Chinese banks alone. Energy, basic materials, and the communication services sectors also receive adequate allocations, while health care and real estate holdings are neglected. The fund doesn’t offer much exposure to the consumer goods sector, which is a big setback since this is a critical component to any long-term China strategy.
It’s hard to ignore the market cap bias that is also present in MCHI. The fund allocates over two-thirds of its total assets to giant cap size companies and large caps make up the remaining chunk. Investors should consider using MCHI in conjunction with small-cap China ETFs like HAO or ECNS to achieve more rounded exposure by diversifying holdings across companies of all sizes.
When comparing this China ETF to FXI, another iShares product, there is a lot to like. MCHI offers exposure to about 150 stocks, casting a considerably wider net than most other options. And the expense ratio of just 61 basis points is towards the low end of the spectrum; this ETF stands out as a fund that is both cost efficient and relatively broad based. As such, MCHI has potential to be used as a part of a multi-pronged approach to China; this fund offers balanced large cap exposure, and could be nicely complemented by a small cap focused fund.
Besides some of the sector and market-cap biases highlighted previously, there isn’t a whole lot to dislike about MCHI; the portfolio may not offer a one stop shop for China exposure, but the depth of holdings gives investors a much broader exposure than more popular alternatives including such as FXI.
As mentioned previously, this fund is fairly new and thus may not be as instantly liquid in large blocks as FXI. For investors who value the presence of penny-wide spreads and the ability to move in and out of a position quickly, other ETFs may have the advantage here. It’s also worth noting that MCHI is not optionable at the moment; for investors looking to implement more complex strategies involving options, FXI boasts by far the most liquid and deep options market.
Overall, MCHI can certainly serve as a strong core component to a portfolio, but should not be thought of as a stand-alone product for China exposure as it comes with several significant flaws. Investors seeking a product with similar exposure should consider the cheaper and more liquid GXC, while those who require a short-term tactical instrument with unparalleled liquidly should look no further than FXI.