International Cross-Asset Investment Research

Todd Rosenbluth
February 9, 2014
Todd Rosenbluth
Director
ETF and Mutual Fund Research
Global Markets Intelligence
55 Water Street
New York, NY 10041
212-438-5041
[email protected]

A Focus on China
A Review of ETF Alternatives Investors Should Consider
While diversified emerging market equity ETFs were out of favor in 2014 and in
January 2015, investors put fresh money into single country focused products.
Among the most popular were Chinese offerings, helped in part because the
country's fundamentals remain relatively strong according to S&P Capital IQ's
Global Markets Intelligence.
John Krey, International Cross-Asset Investment Analyst for S&P Capital IQ, notes
that Chinese real GDP growth is forecast to recede to 7.0% from 7.4% in 2014, as
the economy rebalances in direction of consumption and works through surging
labor costs. However, Krey points out that Chinas growth is much stronger than
developed markets and many, if not most, emerging markets.
Krey believes that the People's Bank of China has plenty of scope to relax credit
further, but is awaiting the announcement of the state's 2015 budget in addition to
growth targets this year and next for the domestic economy at the next session of
the National People's Congress scheduled in March. Krey thinks China is one of the
more attractive emerging markets, bearing in mind market suspicions that the
ongoing anti-corruption campaign may be another official effort to curtail further
decentralization and re-concentrate political power in the hands of the Communist
party in Beijing and its current president, Xi Xinping.

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Investors have a number of ways to gain equity exposure to China, including ETFs
that offer transparency and diversification at a modest cost relative to actively
managed mutual funds. But there are important differences to consider when
reviewing similar sounding ETF alternatives.
iShares China Large Cap ETF (FXI 42 Marketweight) has $6.2 billion in assets
under management. The ETF focuses on the largest and most liquid Chinese and
Hong Kong stocks and is concentrated. Top-10 holdings comprise 57% of assets.
The largest sector exposure is financials (48% of assets), energy (14%) and
telecom services, with no exposure to health care or materials.
The ETF performed relatively well in 2014 compared to the MSCI Emerging Markets
index, rising 11% compared to a 2.2% loss for the latter. However, year to date,
FXI's 1.0% gain is behind the broader index's 2.4% increase. FXI has a relatively
high 0.74% expense ratio, but with 18 million shares traded on a daily basis, it has a
This report is for information purposes and should not be considered a solicitation to buy or sell any security. Neither S&P Capital IQ
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tight $0.01 bid/ask spread.

Meanwhile, SPDR S&P China ETF (GXC 81 Marketweight) has $1 billion in assets
and tracks a different index than the FXI. It has more than 300 holdings --six times
that of FXI -- and top-10 holdings are 42% of assets. However, the bigger difference
to us is its sector exposure. GXC has less financials exposure (32% of assets) and
more in information technology (23%). Further, all 10 GICS sectors are represented
in the portfolio.
GXC also outperformed the MSCI Emerging Markets index during 2014, rising
8.0%, but it lagged FXI. However, its three-year standard deviation of 15.2 is lower
than FXI's 17.9.
Meanwhile, GXC has a lower 0.59% expense ratio, but trades less regularly.
Average daily volume of nearly 200,000 has resulted in a wider $0.05 bid/ask
spread. Both ETFs earn a favorable ranking input for holding stocks with aboveaverage S&P Capital IQ Quality Rankings.
In providing rankings and research on more than 900 equity ETFs, S&P Capital IQ
incorporates holdings-based analysis in addition to a review of other performance,
risk and cost factors.
Other Chinese-focused ETFs include Deutsche X-trackers Harvest CSI 300 China
A-shares (ASHR 35 NR) and PowerShares Golden Dragon China (PGJ 29
Underweight), both of which incur higher expense ratios of 0.80% and 0.70%,
respectively. ASHR focuses on those shares not typically available to investors
outside of the U.S., but there have been higher premium to net asset values for the
ETF due to supply/demand issues tied to ETF share creation limits. Meanwhile, PGJ
is more heavily exposed to information technology stocks than its Chinese peers
and has an even higher standard deviation of 21.1.
John Krey will be joining me for an upcoming S&P Capital IQ international ETF
focused webinar on February 12. To register for the event, please visit
http://bit.ly/1E5WSs1 or email [email protected]

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Emerging Market ETF Assessment

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