A China ETF for the Long-Term
April 11th, 2014 at 9:30am by Todd Shriber
Year-to-date, Chinese equities and some of the relevant exchange traded funds have struggled. The iShares China Large-Cap ETF (NYSEArca: FXI) is off 1.2%, a performance that lags the better than 4% gained by the iShares MSCI Emerging Markets ETF (NYSEArca: EEM).
China is EEM’s largest country weight at 18.1%. Illustrating the weakness in Chinese stocks this year, FXI is also the second-worst performer among the four major ETFs tracking the BRIC nations. Only the Market Vectors Russia ETF (NYSEArca: RSX) has been worse. [Behind the BRIC ETF Rally]
That does not mean opportunity is lost with China ETFs. The world’s second-largest economy still offers opportunity, particularly for long-term investors. With emerging markets equities inexpensive and Chinese stocks among the most discounted, the time could be right to consider China ETFs while reconsidering that approach with the SPDR S&P China ETF (NYSEArca: GXC).
With $794.4 million in assets under management, GXC is the third-largest China ETF behind FXI and the iShares MSCI China ETF (NYSEArca: MCHI). As is often said of ETFs, size rarely matters and GXC epitomizes that sentiment. Over the past two years, GXC has outpaced both FXI and MCHI. In fact, GXC has more than doubled the 6.9% returns offered by FXI. [Different ETF Avenues to China]
GXC also presents investors with opportunity to capitalize on Beijing’s efforts to lure increased foreign investment by liberalizing Chinese financial markets. [Increased Access to China With ETFs]
“China is liberalizing their financial markets rapidly which allows fast-growing companies to raise capital internationally,” State Vice President and Head of Research David Mazza told ETF Trends. “GXC can own these foreign listings, which is a competitive advantage relative to peers. In addition, the drivers of Chinese economic growth are shifting from investment and exports to a more consumption and technology-oriented economy. GXC stands to benefit from these economic shifts, as it is significantly overweight the technology and consumer sectors relative to its peers.”
Due to increased concern about China’s shadow banking system and worries about corporate debt defaults, sector weights in China ETFs take on increased importance. In other words, lightening up on financial services stocks might not be a bad idea.