'A Look Inside Can Prove Meaningful': Queries Warranted With China ETFs

After slumping last year and acting as significant drags on the broader emerging markets complex, Chinese stocks are rebounding.

With Chinese stocks acting as leaders in the 2019 emerging markets resurgence, investors are reminded that China exchange traded funds are rarely similar to each other.

What Happened

Take the cases of the iShares China Large Cap ETF FXI and the iShares MSCI China ETF MCHI, the two largest China ETFs in the U.S.

As of Monday, Feb. 4, FXI was up 9.5 percent year-to-date, which sounds impressive until discovering that FXI is slightly trailing the MSCI Emerging Markets Index. On the other hand, as of Feb. 4, MCHI was beating FXI by nearly 300 basis points.

As CFRA Research notes, those holding- and sector-level differences among China ETFs are significant, particularly with some investors revisiting Asia-Pacific stocks.

Why It's Important

“Since September 2018, CFRA has maintained an Overweight recommended stance on Asia Pacific equities, with our Investment Policy Committee finding an attractive valuation for the MSCI Asia Ex-Japan index, given 12-percent projected earnings growth,” Todd Rosenbluth, CFRA's director of ETF and mutual fund research, said in a note released Tuesday.

“Further, CFRA expects emerging Asia to see continued investor interest as China's fiscal stimulus gains traction and the Chinese yield curve steepens. In addition, if Chinese/U.S. trade relations improve, the Chinese economy could strengthen. At the end of January, China's weaker manufacturing sector showed signs of slight improvement.”

Obviously, holdings drive performance differences. FXI holds just 50 stocks, hardly reflective of the massive Chinese equity market. MCHI holds 302 names. Over the past three years, MCHI has been slightly more volatile than FXI, but the former outpaced the latter by 1,000 basis points during that period.

What's Next

“There are a variety of ways investors can gain diversified exposure to China, using either ETFs or mutual funds,” Rosenbluth said. “However, a look inside can prove meaningful since many of the strategies hold different securities.”

Sector differences between the two behemoth China ETFs are also evident. FXI allocates almost two-thirds of its weight to just two sectors: financial services and communication services. In MCHI, communication services, financials and consumer discretionary names combine for just over two-thirds of that fund's weight.

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