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China: Same Country, Different Returns for 2 ETFs

A closer look at China, one of the fastest-growing major economies in the world.

07/31/2012

While economic growth is slowing in China, the world’s largest country by population is still the second-largest economy and it remains one of the fastest-growing major economies in the world. The country doesn’t simply loom large on the global economic stage, but elsewhere as well. The country has a significant footprint in the ETF universe where more than 220 funds offer exposure to the Chinese growth story.

That does not mean all China ETFs are the same. Far from it. In a new research note, S&P Capital IQ examined two of the more familiar names among China ETFs, the iShares FTSE China 25 Index Fund (NYSE: FXI) and the SPDR S&P China ETF (NYSE: GXC), both of which earn Marketweight ratings from the research firm.

“At first glance, the iShares FTSE China 25 Index Fund may seem similar to the SPDR S&P China ETF as they have the same overall ranking from S&P Capital IQ. However, a closer examination of the funds reveals a number of differences in factors such as sector and holding distribution, market capitalization of assets and cost.” S&P Capital IQ said in the note.

With $4.53 billion in assets under management, FXI is by far the largest China ETF and one of the largest country-specific ETFs, but the fund has been criticized for its relatively narrow focus on the Chinese economy. FXI holds just 26 stocks, focusing mainly on large- and mega-cap state-run companies.

FXI also allocates nearly 53 percent of its weight to financials, highlighting the fact that the ETF is far from diverse at the sector level.

“Which ETF makes the most sense may also depend on the investor’s views on certain key sectors. FXI largely invests in three sectors: Financials, Energy and Telecom Services, while GXC offers exposure to those three plus has significant stakes in Information Technology, Industrials and, to a lesser extent, Consumer Discretionary and Consumer Staples,” S&P said in the note.

GXC is by no means small, but it is just a fraction of the size of FXI with $783.8 million in AUM. The SPDR offering is, however, far larger in terms of number of holdings with 179.

GXC also has a couple of other points in its favor when compared to FXI. The former charges 0.59 percent per year compared to 0.72 percent charged by the latter. Second, GXC is the clear winner in terms of performance. Year-to-date, in the past year and over the past five years, GXC has outperformed its larger rival.

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