China is certainly one of the most important economies in the world, as evidenced by the impact of recent uncertainty in global markets. Yet achieving balanced exposure to the Chinese economy remains a rather challenging task. Low-cost ETFs are limited to replicating an underlying index, which can result in some substantial biases.
Specifically, China ETFs tend to feature:
- Heavy allocations to banks and energy companies;
- Large concentrations in a small handful of mega-cap stocks; and
- Exclusive allocations to shares traded in Hong Kong, and no weight to A-shares traded in Shanghai and Shenzhen in the local currency.
The chart below shows the sector allocation of the iShares China Large-Cap ETF (FXI), which has nearly $6 billion in assets.
As of September 2015.
The next chart illustrates the composition of the FXI portfolio by the market capitalizations of its components.
As of September 2015.
For investors looking to achieve well-rounded China exposure, there are a handful of products that can be used to fill in some of the holes in core China ETFs. (See a complete list of China stock ETFs.)
- Global X China Consumer ETF (CHIQ): This ETF offers pure play exposure to a sector of the Chinese economy that maintains significant long-term potential, but receives very little weight in most China ETFs. CHIQ’s portfolio includes retailers, food and drink companies, carmakers, and media companies.
- WisdomTree China ex-State Owned Enterprises Fund (CXSE): Many of the large-cap banks and oil companies found in China ETFs are at least partially controlled by the Chinese government. This unique WisdomTree ETF steers clear of any state-owned firms, giving investors exposure to companies that are less susceptible to input from Beijing.
- Guggenheim China Small Cap ETF (HAO): As the name suggest, this ETF represents a way to tap into a portfolio of smaller Chinese companies that aren’t included in FXI and similar products. HAO has more than 300 individual holdings, and no single stock makes up more than 2 percent of the portfolio.
- Global X NASDAQ China Technology ETF (QQQC): Though the tech sector receives a meaningful allocation in FXI — it makes up about 11 percent of the portfolio — some investors may prefer to weight this corner of the market more heavily. QQQC holds a diversified portfolio of about 40 Chinese tech companies, including semiconductor manufacturers, search engines, and social media sites.
- Deutsche X-Trackers Harvest CSI China A-Shares ETF (ASHR): This ETF offers exposure to the A-share market, which historically had been accessible only to Chinese citizens. By contrast, most China ETFs hold shares traded in Hong Kong and denominated in Hong Kong dollars; A-shares are listed on exchanges in Shanghai and Shenzhen, and denominated in yuan.
Using the funds above, investors can construct a portfolio with stocks of multiple sizes, sectors, currency denominations, and exchange listings. In exchange for the added complexity, the result is more diversified exposure that may maintain greater long-term return potential.
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