Financials may be undervalued after the beating they’ve received in recent years, but WisdomTree points out that some China ETFs have more than 50% of their portfolios concentrated in the sector. “Removing financials and providing better diversification may reduce risks,” the firm says.
For example, iShares FTSE China 25 Index Fund (NYSEArca: FXI) and SPDR S&P China ETF (NYSEArca: GXC) have 55.9% and 31.8% in the financial sector, respectively.
WisdomTree also touts CHXF’s dividend approach, pointing out that Chinese stocks have been increasing their dividend payouts faster than other markets over the past decade.
“Investors can take advantage of potentially high-yielding stocks in China to augment domestic or global dividend income,” the firm says in a white paper.
WisdomTree is hoping the new China ETF can follow in the footsteps of its other ex-financials funds, DTN and DOO, and gather assets.
However, in a review of DTN, which invests in U.S. stocks, Morningstar analyst Alex Bryan wonders if carving out financial stocks is akin to fighting yesterday’s battle.
“This type of backward-looking sector avoidance may not lead to the best outcome. Because the fund excludes financials, it can lag its peers as interest rates rise or the real estate market recovers,” he writes in an analyst report on the ETF.