Helped by improving economic data and expectations that last week’s no tapering announcement by the Federal Reserve will send emerging markets stocks rallying into the end of the year, the iShares China Large-Cap ETF (NYSEArca: FXI) has surged nearly 23% in the past three months.
That is an impressive performance by the largest and most heavily traded China ETF, but is far from the best run among China ETFs. One China ETF that continues to trounce FXI is the PowerShares Golden Dragon China Portfolio (NYSEArca: PGJ). PGJ has “just” $267.5 million in assets under management compared to almost $5.9 billion for FXI. Proving that size does not always matter with ETF, PGJ is up nearly 43% over the past 90 days. [China ETF Trounces Rivals]
PGJ’s out-peformance of FXI is not confined to the aforementioned 90-day period. Rather, the PowerShares offering has made a habit of outpacing its larger rival. Even with FXI’s sharp reversal since late June, the fund is still slightly in the red on a year-to-date basis. But while market observers lamented the then gloomy fate of China ETFs in the first and second quarters, PGJ was quietly bucking the trend on its way to a year-to-date gain of nearly 47%.
Explaining the performance gap between PGJ and FXI is easy and, at this point, well-documented. It really boils down to what makes each ETF tick. Regarding FXI, the primary drivers of that ETF’s returns are large- and mega-cap state-owned companies, namely banks. FXI allocates nearly 56 percent of its weight to the financial services sector, a trait that made the ETF vulnerable earlier this year when China’s interbank lending rates unexpectedly surged. [More SHIBOR Woes Could Slam These ETFs]
On the other hand, PGJ is just as concentrated in one sector, but it is the right sector as far as Chinese stocks go this year: Technology. PGJ allocated 56% of its weight to technology and Internet names, many of which trade in the U.S. Qihoo 360 Technology (NasdaqGM: QIHU), Sina (NasdaqGM: SINA), Baidu (NasdaqGM: BIDU) and NetEase (NasdaqGM: NTES) combine for about 29% of PGJ’s weight. [Tech Sector is Silver Lining for Emerging Markets ETFs This Year]