iShares China Large-Cap ETF: Analyst Report

By ETFalpha
Contact(at)ETFalpha.uk

Name: iShares China Large-Cap ETF
Symbol: FXI

Role in Portfolio

This ETF provides exposure to China large-cap stocks which are very liquid and are the major components of the Chinese equity universe. China has become an important part of a globally balanced portfolio as the country’s economy now ranks second largest in the world, behind only the U.S.

The FTSE China 50 Index contains companies listed on the Stock Exchange of Hong Kong:

• Red Chips,
• P Chips and
• H shares.

The index is heavily tilted towards the financial sector (around 50-60%). It is also concentrated on the security level as the top 10 names make up almost 60% of the portfolio. Most of the top 10 names are state-owned companies.

The fund distributes dividends from underlying stocks every six months, therefore it might suit an investor seeking moderate levels of income.

Over the period of the last ten years, the FXI delivered the annualized return of 10.20% vs. 8.67% for the EEM, however the result came at the cost of higher volatility. The FXI delivered the standard deviation of 27.91% vs. 23.48% of the EEM. That proves the FXI is more risky than the EEM.

The coefficient of linear correlation between the FXI and EEM is 0.84 which confirms the level of strong correlation between the two ETFs. That is not a big surprise as China constitutes around 21% of the iShares MSCI EM ETF (EEM).

FXI Correlation Matrix (last 10 years)

Economy – Fundamental Insight

China’s global trade exceeded $4.16 trillion at the end of 2013. It first broke the $100 billion mark in 1988, $200 billion in 1994, $500 billion in 2001, $1 trillion mark ($1.15 trillion) in 2004,$2 trillion mark ($2.17 trillion) in 2007,$3 trillion mark ($3.64 trillion) in 2011,and $4 trillion mark ($4.16 trillion) in 2013. The table below shows the average annual growth (in nominal US dollar terms) of China’s foreign trade during the reform era.

The vast majority of China’s imports consists of industrial supplies and capital goods, notably machinery and high-technology equipment, the majority of which comes from the developed countries, primarily Japan and the United States. Regionally, almost half of China’s imports come from East and Southeast Asia, and about one-fourth of China’s exports go to the same destinations. About 80 percent of China’s exports consist of manufactured goods, most of which are textiles and electronic equipment, with agricultural products and chemicals constituting the remainder. Out of the five busiest ports in the world, three are in China. The U.S. trade deficit with China reached $232.5 billion in 2006, as imports grew 18%. China’s share of total U.S. imports has grown from 7% to 15% since 1996.

China Export Treemap by Product (2012) from Harvard Atlas of Economic Complexity

Export growth has continued to be a major component supporting China’s rapid economic growth. To increase exports, China pursued policies such as fostering the rapid development of foreign-invested factories, which assembled imported components into consumer goods for export and liberalizing trading rights. In its 11th Five-Year Program, adopted in 2005, China placed greater emphasis on developing a consumer demand-driven economy to sustain economic growth and address imbalances.

China’s investment climate has changed dramatically with more than two decades of reform. In the early 1980s, China restricted foreign investments to export-oriented operations and required foreign investors to form joint-venture partnerships with Chinese firms. The Encouraged Industry Catalogue sets out the degree of foreign involvement allowed in various industry sectors. From the beginning of the reforms legalizing foreign investment, capital inflows expanded every year until 1999. Foreign-invested enterprises account for 58–60% of China’s imports and exports.

Index/ETF Construction

The iShares China Large-Cap ETF seeks to track the investment results of an index composed of large-capitalization Chinese equities that trade on the Hong Kong Stock Exchange. The underlying index is the FTSE China 50 Index. The FXI ETF was almost $5.7 billion in size as of 12-Dec-2014. The portfolio is well diversified with 51 holdings as of 11-Dec-2014.

The top financial holding of the FXI ETF constitutes around 8.48% of the portfolio while the top 5 allocations account for about 39%.

FXI Top 5

On the sector level the financials account for almost 50% of the ETF whilst the top 3 sectors: finacials, oil & gas as well as telecommunications constitute almost 74% of the portfolio.

FXI Sector Allocations

Technical Charts

FXI ETF 3Y Absolute Performance Chart – Courtesy of StockCharts (12-Dec-2014)

FXI ETF 3Y Relative Performance Chart (EEM) – Courtesy of StockCharts (12-Dec-2014)

Fees

This fund levies a 0.74% expense ratio.

Alternatives

SPDR S&P China ETF (GXC) is a more diversified fund than FXI. It still holds significant stakes in large-cap stocks. It charges a lower expense ratio (0.59%). GXC holds about 300 stocks, and top 10 holdings represent nearly 50% of fund assets versus nearly 60% for FXI. Financial companies account for 33% of fund assets versus 50% for FXI. On the downside, the top GXC allocation is Baidu which makes up 25% of the portfolio vs. the FXI top allocation which is less than 9%.

Important Information Related to this Article

Please familiarize yourself with our DISCLAIMERS every time you engage the site: they’re updated constantly without notice. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product. ETFalpha did not own any shares of the mentioned ETFs at the moment of writing this article.

Source: iShares, SPDR, Wikipedia, Morningstar

ETFs: FXI