Big Differences In China Mean Big Differences In Returns

There are close to 300 exchange traded funds that are either devoted to or off some exposure to Chinese stocks. Obviously, that's a large enough number to lead to some significant differences in how these ETFs approach equities in the world's second-largest economy.

Of course, those differences create significant discrepancies when it comes to total returns and that is true over short and long holding periods. Comparing the WisdomTree China ex-State-Owned Enterprises Fund CXSE against traditional China ETFs is a case study in how different China ETFs lead to varying investor outcomes.

The WisdomTree China ex-State-Owned Enterprises Fund debuted in mid-June, replacing the WisdomTree China Dividend ex-Financials Fund as the latest emerging markets ETF to overtly avoid state-owned enterprises (SOEs).

In other words, traditional China ETFs that weight their holdings by market capitalization are usually chock full of government-run companies and that usually means massive allocations to energy, financial services, telecom and utilities sectors or some combination of that group.

Of those four sectors, only financial services are found in CXSE to the tune of 19.1 percent. While that may sound large, CXSE's combined allocation of nearly 64 percent to the consumer discretionary and technology sectors is what really drives this ETF.

One way of looking at CXSE is that it is new China while traditional China ETFs are old China.

“On a tactical basis, one argument for repositioning now is that many investors in legacy China positions are likely facing a loss—with the sell-off in China over recent years. The time could be ripe for tax-loss harvesting out of those older positions into a strategy that is better positioned to reflect China’s economic growth goals going forward,” said WisdomTree Research Director Jeremy Schwartz in a recent note. 

Getting people to break from what they know or what feels familiar is tough in any field, but it's particularly true in the world of ETFs. That is unfortunate because returns are what really matters. Well, perhaps this will convince investors to give CXSE a closer look: Over the past year, CXSE has outpaced the largest China ETF by over 900 basis points.