A Visual Guide to FXI, iShares’ China ETF

For those seeking exposure to Chinese stocks through an exchange traded fund, the iShares China Large-Cap ETF (FXI) is by far the most popular option. The 30 or so ETFs targeting China have about $11.5 billion in assets, and FXI accounts for more than half of that total. The charts below highlight several of the unique aspects of FXI that impact the type of exposure offered by this product. 

FXI Portfolio

As the name suggests, FXI holds a portfolio of large-cap Chinese stocks. Because the biggest companies in China tend to be banks and energy giants, the underlying portfolio has a definite tilt towards these sectors:

Data Source: iShares. As of August 2015.

State Ownership

Another noteworthy element of FXI relates to the ownership structures of the stocks it holds. Many Chinese companies are state-owned, meaning that the Chinese government is an owner. About 73 percent of China Mobile, which makes up about 9 percent of FXI, is owned by a state organization. Most of the FXI portfolio consists of state-owned companies.

Reflects percentage of FXI assets attributable to each type of company. As of August 2015.

Many China ETFs that are dominated by large-cap stocks will feature similar concentrations. One noteworthy ETF, the WisdomTree Emerging Markets ex-State-Owned Enterprises Fund (XSOE) specifically excludes companies that are controlled by the government.

Hong Kong Connection

The most important feature of FXI for investors to understand relates to the type of security held by this ETF. Chinese stocks involve a somewhat complicated share structure with four basic categories of offerings:

1. A-Shares: listed on the Shanghai and Shenzhen stock exchanges, denominated in renminbi, and available only to Chinese investors and certain licensed foreign investors;
2. H-Shares: listed in Hong Kong, denominated in Hong Kong dollars, and able to be freely purchased by international investors;
3. Red Chips: incorporated outside mainland China, owned by Chinese state-owned companies, listed on Hong Kong exchange and denominated in Hong Kong dollars; and
4. P-Chips: similar to Red Chips, but owned by private individuals.

FXI consists entirely of H-Shares, P-Chips, and Red Chips, meaning that the breakdown of its portfolio by primary exchange is simple.

Many Chinese companies list their shares on both mainland and Hong Kong stock exchanges, but there is a significant universe of stocks only accessible through A-shares. The following table compares the FTSE China 50 Index, on which FXI is based, with the CSI 300, a popular benchmark of A-shares:

Data Source: Van Eck. As of June 30, 2015.

For some investors seeking exposure to Chinese stocks, FXI may be sufficient. But it’s important to understand the methodology behind this product, and the composition of the underlying portfolio in the context of the broader Chinese stock markets.

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