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Keeping Up With China's ETFs


FXI is no longer the only choice -- it was only the beginning.

Editor's Note: Paul Weisbruch is the VP of ETF/Index Sales and Trading at Street One Financial, an ETF liquidity provider focused on quality trade execution as well as portfolio construction and product strategy in the ETF space.

It wasn't long ago that ETF exposure to China in the investment community equated to "FXI."

The iShares FTSE/Xinhua China 25 Index ETF (FXI) was launched in 2004, well ahead of the many peers that have spawned recently, so it's no surprise that the ETF holds the lion's share of assets (about $8 billion currently). FXI owns the 25 largest and most liquid Chinese companies, so there's clearly a large-cap skew. However, like everything else in the ETF industry, innovation and improvement are the driving forces behind new product launches from ETF sponsors eager to carve into FXI's market share.

For the past six years, retail and institutional investors bought FXI as their portfolio exposure to China, but it is near certain that most put little thought in the level of diversification that FXI offered. The product owns 25 stocks based in China, and the top 10 holdings make up more than 60% of the fund. Furthermore, four of the top five holdings are China Mobile (CHL), China Construction Bank, Industrial and Commercial Bank of China, China Life Insurance (LFC), and Bank of China.

See a theme here? That's right, large-cap financials make up 46% of the ETF. Is this a good or bad thing? It's hard to say really, but for an investor who thinks they own "China" in their portfolio with a stake of FXI, it may be more accurate to state that they are concentrated in the Chinese Financials sector, with some scattered exposure to other industry sectors.

Another iShares China offering, iShares FTSE China HK Listed Index (FCHI), is similar to FXI, although it owns more than 25 securities. Most of the constituents of the index, however, are large-cap oriented, and this ETF too is heavily skewed toward Financials (45% of the fund).

Similar to FXI, State Street offers SPDR S&P China (GXC), which is also a cap-weighted ETF based on the S&P China BMI Index. Financials are also heavily over-weighted in this index, weighing in at 33, and like FXI, this ETF has a large-cap bias.

So investing in China for an ETF investor historically has offered little in the way of flexibility for those who wanted to play different sectors, or perhaps smaller cap, more speculative companies. This fact obviously wasn't lost on competitors to iShares, as a host of China-based ETFs have hit the market in the recent past. PowerShares offers more specialized exposure to China with PowerShares Golden Dragon Halter USX China (PGJ), which seems to spread out the sector-specific risk better than GXC or FXI, having its highest sector weighting in Energy (21.34%), and healthy doses of Info Tech (18.69%), Telecom (16.93%), and others. PGJ is skewed toward large cap, with about 52% of the portfolio in large caps and the remainder in mid and small caps.

Claymore is now in the China ETF space as well, and for those investors looking to trade risk for higher returns, they may want to consider Claymore/AlphaShares China Small Cap Index (HAO). Those seeking broader diversification among companies of different market capitalizations meanwhile may look at Claymore/AlphaShares China All Cap (YAO).

An upstart ETF provider called Global X has created a niche and launched a suite of sector based China ETFs that allow the investor to make specific Chinese industry sector bets. Global X China Financials (CHIX), Global X China Industrials (CHII), Global X China Consumers (CHIQ), Global X China Materials (CHIM), Global X China Technology (CHIB), and Global X China Energy (CHIE) are the offerings at the moment, and clearly allow the investor to build more specialized exposure to China into their portfolios.
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No positions in stocks mentioned.

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