There are some stark realities for investors in an increasingly correlated, interconnected world.
For example, China is home to a behemoth of a banking system. That girth is reflected in some of the major China exchange traded funds, which has become a point of criticism. The iShares China Large-Cap ETF (NYSEArca: FXI) by far the largest, most heavily traded China ETF, allocates a whopping 55.2% of its weight to the financial services sector. [Getting Selective With China ETFs]
That leaves FXI and others like vulnerable to controversy and possible shocks in the Chinese banking system. Recently, there have been ample amounts of controversy as concerns have escalated about China’s shadow banking system and a possible debt crisis in the world’s second-largest economy.
“They say every bull market needs to scale a wall of worry, and late last week, further evidence was added to this truism: a possible $500 million default by a Chinese investment trust that was distributed to investors by a state-owned bank, the Industrial and Commercial Bank of China (ICBC),” said WisdomTree Chief Investment Strategist Luciano Siracusano III in a note out Wednesday. “The tremor reverberated outside China because a Chinese banking crisis that spreads outside its borders is the type of exogenous shock that could put an end to both the global economic recovery and the bull market in stocks.”
Investors can stick with China and its deeply discounted valuations with the WisdomTree China Dividend ex-Financials Fund (NasdaqGS: CHXF), an ETF that as its name implies, features no exposure to Chinese banks.