As the ETF world has grown over the past few years, some sectors have seen an incredible level of product development, giving investors a multitude of investment options to achieve their financial goals. That is especially true in the emerging markets ETF space, where increased granularity allows investors to customize their exposure to the world’s developing economies.
China alone is the focus of more than a dozen ETFs; there are currently 18 funds in the China Equities ETFdb category, each of them delivering a unique risk/return profile and different ways of accessing perhaps the world’s most important economy. Despite the numerous choices, however, many investors still gravitate towards the iShares FTSE China 25 Index Fund (FXI), which currently has roughly two-thirds of total assets in the China Equities ETFdb category.
The index underlying FXI can be thought of as the Dow Jones Industrial Average (DIA) of China: It consists of 25 of the largest Chinese companies (though the Dow is price-weighted, while FXI is a cap-weighted fund). While there is nothing wrong with FXI – its liquidity remains unmatched by any other product in the category – investors are potentially missing out on a variety of compelling aspects of China’s growth story if their exposure is limited to just this ETF.
This is a result of the fund’s allocation methodology, which focuses on the 25 biggest publicly traded firms in the nation. Thanks to this strategy, the fund is heavily weighted towards mega-cap stocks in four sectors: Financials (47%), telecommuncations (18%), oil & gas (16%), and basic materials (10%). In fact, the fund offers an allocation of under 2% to consumer service companies, with technology firms remaining absent from the list altogether.
So many investors who are bullish on China may have some rather large holes in their exposure profile to the country, suggesting that some key additions likely need to be made in order to plug those gaps. In light of this, we have highlighted three ETFs below that could help investors in FXI – or other large-cap China funds – round out their exposure to the surging nation.
Global X China Consumer ETF (CHIQ)
For investors seeking to obtain exposure to the Chinese consumer, CHIQ offers a compelling choice for direct investment in the sector. The fund tracks the S-BOX China Consumer Index, a benchmark designed to reflect the performance of the consumer sector in China. It is made up of securities of companies which have their main business operations in the consumer sector and are domiciled in China or have their main business operations in this country. The fund consists of 40 securities in total and offers heavy exposure to the retail (32%), food (21%), consumer service (18%), and automobile (15%) sectors of the Chinese economy. The fund charges a 65-basis point expense ratio.
Guggenheim China Technology ETF (CQQQ)
Although China is one of the world’s largest markets for high-tech goods and is a major supplier of technology products, allocations to the sector remain absent in virtually all of the most popular China equity funds. For investors seeking to correct this imbalance, CQQQ presents an intriguing option. The fund consists of 32 securities in total and has more of a large-cap tilt than the majority of the funds on the list, with a weighted average market capitalization of $7.1 billion. The fund even has several companies in it that many westerners are likely to be familiar with, including top ten holdings Baidu.com (BIDU) (9.8%), Lenovo Group (LNVGY.PK) (7.7%), and Alibaba.com (ALBCF.PK) (4.1%). The fund charges an expense ratio of 72 basis points and has gained roughly 10% so far in 2010.
EGShares China Infrastructure Fund (CHXX)
While not necessary as "forgotten" as some of the other ETFs on the list, exposure to China cannot be considered complete without at least some exposure to infrastructure firms in the country. As the nation develops, it is going to need an increasingly robust infrastructure to keep up with the high level of urbanization, suggesting that funds like CHXX could be expected to surge over the long term. The fund tracks a free-float market capitalization weighted index that is comprised of 30 of the largest companies engaged in the sector. Currently, the fund offers heavy exposure to the construction, real estate, mining, and alternative energy industries, which all make up at least 13% of assets. CHXX charges an expense ratio of 85 basis points.
Disclosure: No positions at time of writing
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