A common criticism some China ETFs is that the funds are excessively allocated to the financial services sector. For example, the $5 billion iShares China Large-Cap ETF (NYSEArca: FXI), the largest and most heavily traded China ETF, allocates 52% of its weight to the financial services sector.
Even in docile market settings, an ETF with more than half its weight in just one sector is a risk, but the environment for Chinese banks has been anything docile. The June spike in SHIBOR rates prompted questions about liquidity within the Chinese banking system, a scenario that weighed on FXI and several other large China funds. [China ETFs Plunge on PBOC Liquidity Comments]
Adding to the woes for investors is that analysts tracking Chinese banks have been reluctant to sound bearish views on those stocks. Seventy percent of analysts covering Chinese financial stocks rate them a buy, the highest among the world’s top 10 markets, reports Nishant Kumar for Reuters. Analysts have remained bullish on Chinese banks even as mutual funds have unloaded those stocks and short sellers have smelled blood, according to Reuters.
Reuters notes that none of the 37 financial services stocks in the MSCI China Index is rated a sell. That is the index tracked by the iShares MSCI China ETF (NYSEArca: MCHI), an ETF with a 38.3 weight to the financial services sector. That is about two-and-a-half times the fund’s second-largest sector weight, energy. [More Troubling Headlines for China ETFs]
Indicating that prospective buyers of China ETFs may want to pay more attention to the buy side than the sell side, “a Reuters poll of Chinese funds in June showed portfolio managers were planning to invest 13 percent of their fund assets in financial stocks over the next three months, down from 20.1 percent in December,” according to the news agency.