– The oldest available China Equities ETF (FXI) has outperformed an S&P 500 index fund by 1.81% CAGR (compound annual growth rate) over the last 13 years
– There are currently 6 ETFs available that have over 50% exposure to Chinese equities that are 10 years old or older
– 3 of these ETFs have significantly outperformed FXI over the last 10 years
– 1 of these ETFs adds exposure to India without degrading long-term returns
– China encompass approximately 19% of the world’s population
To build a world-wide Equity portfolio that is diversified and profitable, a portfolio manager would be negligent to not have exposure to Chinese Equities. The reason I use such strong language is that China is where approximately 19% of the world’s population resides. Additionally, exposure to Chinese equities has historically added diversity to an equity portfolio without degrading overall portfolio returns.
I do not invest in mutual funds. But, they are very useful for observing their historical data when ETFs do not have enough data due to their relatively short existence. In the following chart I have selected the Matthews China Fund (MCHFX) to back test against an S&P 500 index fund.
MCHFX vs S&P 500: March 1998 – January 2018
Source: Portfolio Visualizer
The Matthews China Fund has outperformed an S&P 500 index fund by 4.06% CAGR over the last 20 years. While I don’t personally expect this kind of extraordinary performance in the future; I do believe that some of these Chinese Equity funds can continue to outperform the S&P 500 long-term.
Since this blog is about ETFs and I heavily invest in ETFs, I’d like to turn your attention to the 6 oldest ETFs available that have at least 50% exposure to Chinese equities. Utilizing ETFdb.com, I was able to determine that there are 38 ETFs available with at least 50% exposure to Chinese equities. I then eliminated 10 of those funds because they are sector specific funds. I also eliminated another 22 ETFs due to being younger than 10 years old.
Source: Portfolio Visualizer & ETFdb.com
Let’s begin with the oldest available China ETF, the iShares China Large-Cap ETF (FXI).
FXI vs S&P 500: November 2004 – January 2018
Source: Portfolio Visualizer
From November 2004 to January 2018 FXI has outperformed an S&P 500 index fund by 1.81% CAGR. China is considered one of the emerging markets of the world. As with most emerging market funds, there is a fair amount of volatility in these Chinese equity funds. But, when the holders of emerging market funds stick with these funds long-term they are usually rewarded handsomely. An additional benefit to holding emerging market funds, such as FXI, is that there is normally a low correlation to U.S. markets, 0.64 in this case. Although FXI has performed well during the last 13 years; there are 3 other ETFs with heavy Chinese equity exposure that have done significantly better.
GXC vs PGJ vs FNI vs S&P 500: June 2007 – January 2018
Source: Portfolio Visualizer
HAO vs BKF vs FXI: February 2008 – January 2018
Source: Portfolio Visualizer
GXC vs PGJ vs FNI vs FXI: June 2004 – January 2018
Source: Portfolio Visualizer
In the chart above, these 3 funds (GXC, PGI & FNI) have significantly outperformed the largest and oldest Chinese equity ETF (FXI). Because of this, it is my contention that the most popular ETF is not always the best choice when building an equity portfolio. Let’s now examine what is in the 3-top performing China ETFs and how they are managed:
– GXC: The SPDR® S&P® China ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P® China BMI Index (the “Index”). Seeks to provide the investable universe of publicly traded companies domiciled in China that are available to foreign investors. Publicly listed companies with a float-adjusted market cap of $100M and at least $50M in annual trading volume are included in the Index.
– PGJ: The PowerShares Golden Dragon China Portfolio (Fund) is based on the NASDAQ Golden Dragon China Index (Index). The Fund generally will invest at least 90% of its total assets in equity securities of companies deriving a majority of their revenues from the People’s Republic of China and that comprise the Underlying Index. The Underlying Index is composed of US exchange-listed companies that are headquartered or incorporated in the People’s Republic of China. The Fund and the Index are rebalanced and reconstituted quarterly.
– FNI: Investment Objective/Strategy – The First Trust Chindia ETF is an exchange-traded fund. The investment objective of the Fund is to seek investment results that correspond generally to the price and yield, before fees and expenses, of an equity index called the ISE ChIndia Indexâ„¢. Establish the total population of companies that are domiciled in either India or China and whose shares or ADRs are listed on a U.S. securities exchange. Remove companies that do not meet the component eligibility criteria which include minimum market capitalization and trading volume requirements. Rank the remaining stocks by their liquidity score. (Rank all eligible stocks separately by market cap and three-month average daily dollar volume. Sum the ranks for each stock to get a liquidity score.) Select the top 25 stocks from each country by liquidity score. If less than 25 stocks are available for a country, then continue selecting stocks from the other country until a maximum of 50 stocks are selected. Weight according to the following methodology: top three ranked stocks in each country are weighted at 7% each. The next three in each country are weighted at 4% each. The next three in each country are weighted at 2% each and the remaining stocks are equally weighted. The ISE ChIndia Index TM is rebalanced on the application of the above model on a semi-annual basis.
My take on the top-3 China equity funds:
– GXC: The obviously leader of all China equity ETFs. Low P/E ratio at 12.5%. Relatively good trading volume at 111,000 shares traded per day. Well diversified with 338 holdings.
– PGJ: 2nd oldest available China ETF. Outperformed the oldest China ETF (FXI) by 4.04% over the last 10 years.
– FNI: Top performer over the last 10-year period. 50/50 Exposure to both China & India. While China encompasses approximately 19% of the world’s population, adding exposure to India increases this population base to 37%. Trades commission-free at TD Ameritrade.
I believe that adding some exposure to China in your equity portfolio can be a great diversifier without decreasing overall returns. China is considered one of the world’s emerging markets and inherently has similar volatility. It has been my experience that this volatility is of great benefit to long-term holders in these types of funds.
Disclosure: I own shares of the FNI ETF and intend to accumulate more shares in the future. I am not a registered investment advisor. Please perform your own due diligence or seek professional advice prior to investing in any funds mentioned in this article.
Thank you for reading this article. Please share it with a friend.
Very respectfully, Micah McDonald, aka the Deep Value ETF Accumulator
Bonus Chart
GXC vs PGI vs FNI vs MCHFX: June 2007 – January 2018
Source: Portfolio Visualizer