“Know thy fund.”
These three words make all the difference in making intelligent fund choices. These three words also tend to get tossed out a window by many investors because, hey — a fund’ll do what it says it’ll do, right? So if you wanted to, say, get broad exposure to China, all you’d need to do is buy any China ETF, and you’d be set, wouldn’t you?
Sure, you’d be invested in Chinese stocks. But picking a China ETF because the fund’s name has “China ETF” in it, then considering yourself properly exposed, would be like walking into Macy’s blindfolded, grabbing three random articles of clothing, putting them on and proclaiming, “I’m properly dressed!”
You might technically be dressed, but it very well might not be proper.
To really drive the point home, here’s a visual aid — not of yours truly in a halter top, jeans and a pair of athletic shorts over the jeans, but of three China ETFs. All three have “China” and “ETF” in the name, and all three would, in fact, get you invested in Chinese stocks:
You’re currently looking at the graphical sector breakdowns of the iShares China Large-Cap ETF (FXI), the iShares MSCI China ETF (MCHI) and the SPDR S&P China ETF (GXC). (The color codings for each sector aren’t identical, but very close. For instance, the darkest blue is financials, the darkest green is industrials, etc.)
At a glance, then, would you say that an investor in FXI is exposed to the same China that an investor in GXC is?
I sure wouldn’t.
For example, let’s look at FXI, which at $5.5 billion in assets is the largest, most popular China ETF by far.
Let’s say you want to invest in China, and you buy the FXI. More than half your money is being invested in financials. That’s great if you’re really bullish on China’s financial sector, but not great if you just want to be broadly exposed to China in general.
For comparison’s sake, let’s say you want to invest in America, and you buy the largest U.S. equity fund, the SPDR S&P 500 ETF (SPY) … only 16% of your ETF dollar would be invested in financials. And the biggest concentration (information technology) would only be 19%. So, your chart would look like this instead:
That’s broad exposure.
Funnily enough, you can get broader exposure than the FXI from the very fund provider that offers FXI — iShares’ MCHI, while still financials-heavy, is more evenly exposed to other sectors. Meanwhile, State Street Global Advisors’ GXC has the best spread of the trio in that respect. Ergo, if you want to be as exposed as possible to all of China’s sectors, GXC would make the most sense.
I should point out that none of this is a recommendation for or against any of these three China ETFs. When selecting a fund, you need to look at more than sector diversification — you also need to consider the sizes of the companies your fund holds, how much it’s focused on defense/growth, expenses and other factors.
In fact, I actually get my Chinese exposure through the Guggenheim Small Cap China ETF (HAO), which invests in much smaller companies than any of the aforementioned funds and has a much heavier tilt toward consumer stocks. (Just my personal bent.)
No, this conversation is merely a reminder that there’s more to funds than their names.
And considering you’re investing your hard-earned money to secure your future comfort, you owe it to yourself to do more than just look at a fund’s name, anyway.
More Information on China ETFs
- FXI: iShares China Large-Cap ETF (iShares)
- MCHI: iShares MSCI China ETF (iShares)
- GXC: SPDR S&P China ETF (State Street Global Advisors)
- HAO: Guggenheim Small Cap China ETF (Guggenheim Investments)