Tips For China ETF Selection

Nearly 300 exchange-traded funds listed in the United States offer exposure to China in some form or fashion. These include single-country ETFs, such as the popular iShares China Large-Cap ETF FXI as well as diversified emerging markets ETFs, including the Vanguard FTSE Emerging Markets ETF VWO.

The sheer number of China ETFs, a population that probably is not done growing as the world's second-largest economy continues doing the same, indicates there is a need for investors to do some homework before jumping into China funds. For example, FXI and the iShares MSCI China Index Fund MCHI sound similar, but in reality these ETFs are notably different.

As Vastly Different As The Chinese Countryside

For example, iShares China Large-Cap ETF (FXI) is the biggest ETF focused on China with $3.1 billion in assets and it gained 10 percent year to date through April 13. Meanwhile, the firm also offers iShares MSCI China (MCHI), a $2.2 billion ETF that climbed 16 percent this year. While MCHI has a 10 basis point lower expense ratio, the differential stems more from what's inside these popular products,” said CFRA Director of ETF & Mutual Fund Research Todd Rosenbluth in a note out Tuesday.

FXI is often criticized for being heavily concentrated and for its large allocations to state-owned enterprises. The ETF holds just 51 stocks, nearly 51 percent of which are financial services names. MCHI features triple the number of constituents as FXI and the former allocates “just” 28.7 percent to financials. Technology, a more compelling opportunity set in the Chinese investment landscape, is MCHI's largest sector weight at 34.5 percent.

An often overlooked though still credible China ETF is the SPDR S&P China ETF GXC, which turned 10 years old last month. GXC provides deeper exposure than FXI or MCHI as the SPDR offering holds more than 350 stocks.

GXC “is up 15 percent in 2017, yet it has a higher stake in technology (29 percent of assets) and lower one in financials (24 percent) than MCHI. At a net expense ratio of 0.59 percent, GXC is 5 basis points cheaper than MCHI. In the three-year period, GXC generated a 7.4 percent annualized total return and outperformed MCHI by more than 50 basis points. The SPDR ETF has $830 million in assets,” said Rosenbluth.

Over the past three years, GXC is the best-performing member of the trio of ETFs mentioned here and the least volatile. CFRA rates GXC and MCHI overweight while rating FXI underweight.

Disclosure: Todd Shriber owns shares of VWO.