- While China as an investment destination has become irresistible, it may be prudent to go with an ETF than individual stocks.
- The SPDR S&P China ETF may be mistaken as a tech ETF with seven of its top 10 holdings being tech companies.
- Overall, the GXC ETF portfolio consists of 884 holdings in total as of December 30, 2021. This is more than the larger China ETFs that I have covered previously.
- The SPDR S&P China ETF has performed similarly to the iShares MSCI China ETF over the various periods of comparison, though the former has a slight edge.
- If readers don't already hold any China ETF and are keen on buying some, the MCHI ETF offers certain advantages over the GXC ETF.
Why go for an ETF instead of individual stocks?
2021 has been a painful year for shareholders of Chinese stocks in general. Alibaba Group Holding Ltd (BABA) had appeared to be the sole target of Beijing after the authorities scuttled the initial public offering [IPO] of its fintech arm, Ant Group. The trigger was often attributed to a scathing speech by its founder Jack Ma decrying that outdated regulations had been hobbling the fintech industry.
That belief, coupled with the positive momentum for tech stocks and a boost for certain Chinese internet stocks by some massive buying of Bill Hwang's family office Archegos, helped push the sector to a crescendo in February. Archegos' leveraged bets subsequently unraveled amid a heightened regulatory environment that had widened beyond Alibaba Group.
The double whammy quickly evaporated the early 2021 gains for many U.S.-listed Chinese ADRs. Thereafter, three main drivers resulted in the unabated selling of these stocks: i) delisting concerns due to the much-hyped Holding Foreign Companies Accountable Act [HFCAA], ii) the decimation of the for-profit after-school tutoring industry virtually overnight, as well as iii) trumpeted fears of a potential repudiation of VIEs by the Chinese government resulting in the Chinese ADRs losing all their value overnight.
In other words, what investors initially thought to be Beijing putting former China's richest man Jack Ma into place turned into fears about the entire spectrum of Chinese stocks. To make matters worse, Washington also ramped up rhetoric on Chinese stocks, making them appear uninvestable. This includes seemingly arbitrarily placing companies into an investment blacklist that has already ensnared hundreds of Chinese entities.
However, China as an investment destination has become irresistible. It has been more than a decade since China overtook Japan to become the world's second-largest economic power behind the United States in terms of GDP. China is projected to surpass the U.S. to take the pole position sometime between 2028 to 2033.
China's GDP has already eclipsed the U.S. in 2014 if we consider purchasing power parity. According to research done by Jeffrey D. Sachs, a director of The Earth Institute, Columbia University, China was larger (in terms of purchasing power parity) than any other economies in the world since it became a unified state more than 2,000 years ago until around 1889 when the U.S. overtook it.
As Chinese consumers improve their purchasing power and confidence to spend, global companies stand to gain. It is only reasonable to expect Chinese companies to reap the benefit as well. According to a report published by Morgan Stanley analysts last year, Chinese consumer spending is set to more than double by 2030. The drivers are greater government emphasis on policies to support the domestic economy, rising household income, continued expansion of urban areas, technology advancements, and demographic shifts.
For investors playing the long game and without the resources or time to analyze the stocks for the individual portfolio amid an increasingly uncertain investment climate, a well-diversified ETF focused on China can be a good alternative.
What Are The S&P China ETF's Holdings?
The SPDR S&P China ETF (NYSEARCA:GXC) may be mistaken as a tech ETF with seven of its top 10 holdings being tech companies. Tencent Holdings (OTCPK:TCEHY)(OTCPK:TCTZF), Alibaba Group, and Meituan (MEIT)(OTCPK:MPNGF)(OTCPK:MPNGY) have the largest weights of the GXC ETF at 11.4 percent, 7.5 percent, and 3.8 percent respectively as of December 30, 2021.
Two other internet giants, JD.com Inc. (JD) and Baidu Inc. (BIDU), are the fifth and eighth-largest holdings. Electric vehicle maker NIO Inc. (NIO), and smartphone cum smart appliance maker Xiaomi Corp. (OTCPK:XIACF)(OTCPK:XIACY) also find themselves in the top 10 holdings. Last year, Xiaomi announced its plans to go into EV-making.
GXC ETF's Top Holdings as of Dec 30, 2021
|Tencent Holdings Ltd.||2,955,815||11.42%|
|Alibaba Group Holding Ltd. Sponsored ADR||900,594||7.53%|
|Meituan Class B||1,983,600||3.78%|
|China Construction Bank Corporation Class H||49,580,623||2.33%|
|JD.com Inc. Sponsored ADR Class A||445,920||2.13%|
|NIO Inc. Sponsored ADR Class A||672,596||1.48%|
|Ping An Insurance (Group) Company of China Ltd. Class H||2,951,600||1.45%|
|Baidu Inc Sponsored ADR Class A||136,744||1.40%|
|Xiaomi Corp. Class B||7,959,000||1.29%|
|Wuxi Biologics (Cayman) Inc.||1,638,500||1.29%|
Source: State Street Corporation
The SPDR S&P China ETF is, however, structured to correspond generally to the total return performance of the S&P China BMI Index. According to S&P Global (SPGI), the S&P China BMI (Broad Market Index) is a comprehensive benchmark that defines and measures the investable universe of publicly-traded companies domiciled in China but are legally available to foreign investors. It is part of the S&P Global BMI.
How Does The SPDR S&P China ETF Compare To Other ETFs?
Overall, the GXC ETF portfolio consists of 884 holdings in total as of December 30, 2021. This is more than the larger China ETFs that I have covered previously. The iShares MSCI China ETF (MCHI) owns 628 holdings and has a net asset of $5.9 billion. The X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) has 312 securities and has a net asset of $2.8 billion.
The iShares China Large-Cap ETF (FXI), as the name suggests, only holds the largest Chinese stocks. Hence, it counts only 50 holdings in its entire portfolio and has a net asset of $4.9 billion.
Despite having nearly triple the securities compared to the ASHR ETF, the top 10 holdings of the GXC ETF has a combined weight of 34.7 percent of the portfolio, much heavier than the 25.0 percent for the former. The MCHI ETF has a much larger concentration at 40.2 percent. The FXI ETF has more than half of its portfolio in its top 10 holdings at 57.3 percent.
Thus, for investors concerned about single-stock concentration, the GXC ETF offers the widest spread of securities while having decent-sized top holdings. It is important to note that the MCHI ETF holds the Hong Kong shares of Alibaba Group, JD, and NetEase while the GXC ETF holds the ADRs of these companies.
As the shares are fungible, the fund manager can switch the ADRs to the Hong Kong shares if needed. Nevertheless, we can only guess what happens when all the funds need to do so in a hurry. For investors who believe that an ugly decoupling between the U.S. and China is inevitable and the U.S. ADRs may be delisted on short notice, the GXC ETF may pose a risk in this respect.
In terms of returns, the Xtrackers Harvest CSI 300 China A-Shares ETF has outperformed the other three mentioned China ETFs whether on a one-year, three-year, or five-year period. The SPDR S&P China ETF has performed similarly to the iShares MSCI China ETF over the various periods of comparison, though the former has a slight edge.
Returns of China ETFs over the past five years
Returns of China ETFs over the past three years
Returns of China ETFs over the past year
Investors may be curious how these ETFs performed in comparison with the U.S. benchmarks and I have just the chart for you. Adding the S&P 500 ETF Trust (SPY) into the mix, we can see that the China ETFs have at certain periods provided investors with superior returns. This may be a forgotten or neglected phenomenon given the recency bias.
Is The S&P China ETF A Good Investment?
The steep plunges suffered by the China ETFs, including the GXC ETF, have provided investors waiting on the sidelines with a more attractive entry point. However, for Chinese equities to reverse from the current doldrum, I suppose market players need to be convinced that Beijing is not out to 'kill' the private sector and U.S.-China tensions should ameliorate substantially.
I explained in a recent article Which Are The Best Chinese Stocks To Watch In 2022? why I believe Beijing is not reversing its policy and going on a campaign to nationalize private entities as some critics charged. I also noted investment experts are seeing signs of the heavy-handed crackdown ameliorating in 2022.
Investors who prefer a systematic manner to gauge ETFs may consider that the quant factor grades for the GXC ETF are currently very poor, ranging from D- for risk to F for momentum.
ETF grades for the GXC ETF (as of December 31, 2021)
Source: Seeking Alpha Premium
In comparison, the ARK Innovation ETF (ARKK) of Cathie Wood's ARK Invest has more Fs but an A- for asset flows. The charismatic fund manager continues to draw in investors with rosy outlooks, predicting a 30-40 percent compound annual rate of return during the next five years for Ark "strategies."
ETF grades for the ARKK ETF (as of December 31, 2021)
Source: Seeking Alpha Premium
For those already holding the MCHI ETF, it may not be meaningful to consider the GXC ETF from the returns perspective. Nonetheless, there are differences as explained earlier that could help investors to diversify further if the intention is to add to one's China ETF ownership.
If readers don't already hold any China ETF and are keen on buying some, the MCHI ETF offers certain advantages over the GXC ETF like a larger net asset value and having more holdings in Hong Kong shares rather than ADRs for companies that have a listing in Hong Kong.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of BABA, BIDU, JD, NTES, TCEHY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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