ETF Investors Are Likely Underallocated to China

Exchange traded fund investors who are too focused on the domestic U.S. markets may be missing out on international opportunities, especially when it comes to China.

According to BlackRock’s research unit, China should no longer be considered an emerging market and investors should raise their exposure to the Asian economy by as much as three times since the country’s capital markets have expanded in both size and sophistication, the Financial Times reports.

“China is under-represented in global investors’ portfolios but also, in our view, in global benchmarks,” Wei Li, chief investment strategist at the BlackRock Investment Institute (BII), told the Financial times. “It has the second-largest equity market, the second-largest bond market. It should be represented more in portfolios.”

Consequently, BlackRock Investment Institute now advised allocation to Chinese assets to be “two to three times” that of diversified global portfolios, like the MSCI All-World index, where China is the third-largest constituent at a weight of 4.2%. Consequently, BII believed China’s weight in a diversified global portfolio should be closer to 10%, or more than Japan but still well below the U.S.

It was “time to treat [China] as an investment destination separate from emerging and developed markets. China’s economy has come through the Covid-19 shock stronger than global peers, just as it did after the global financial crisis,” according to BII’s mid-year outlook published in July.

However, BlackRock’s recommendations comes at a time of increased tensions between the U.S. and China, along with greater regulatory scrutiny from Beijing on the growing influence in its rising technology and internet segments. Politicians in both Washington and Beijing have raised concerns over Chinese companies listing in the U.S., which have contributed to recent volatility.

“The spheres of influence between the two superpowers are moving apart. In the near term that can lead to market volatility. In the longer term, if you want to get China you have to go to China,” Li added.

Investors also have a number of options to access Chinese equity markets through ETFs. For example, the most popular China country-specific ETFs available include the iShares MSCI China ETF (NASDAQ: MCHI), KraneShares CSI China Internet ETF (KWEB), iShares China Large-Cap ETF (NYSEArca: FXI), Xtrackers CSI 300 China A-Shares ETF (ASHR) and SPDR S&P China ETF (NYSEArca: GXC).

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