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FXI’s Not The Best China ETF

July 03, 2012
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When it comes to China ETFs, pay close attention to the details, because investing in China is tricky, and the most popular fund—the $4.8 billion FXI—might not be the best option.

Matt Hougan, our president of ETF Analytics, was on CNBC's Fast Money recently and talked about the pitfalls of the iShares FTSE China 25 Index Fund (NYSEArca: FXI) and why other funds like the SPDR S&P China ETF (NYSEArca: GXC) might be a better choice for those looking for broad China exposure.

I'll pick up where Matt left off to examine in detail the various China ETFs, and why some funds make more sense than others, as there are big differences between them.

When I consider a China ETF, the first thing I check for is what type of shares the ETF is eligible to hold.

As most of us are aware, foreign investment in China is still restricted, and with the exception of a select few qualified foreign institutional investors (QFII), investing in "A-shares" is for the most part off the table.

Therefore, the current ETFs access the Chinese market through a combination of H-shares, Red Chips, P-chips, B-shares or N-shares. Let's call all these shares "investable" Chinese shares.

Let's look at the table below, because there are many different share classes, and grasping their differences is crucial.

Share Type Description
A-shares Chinese companies incorporated in the mainland and traded in Shanghai or Shenzhen in RMB
H-shares Chinese companies incorporated in the mainland and traded in Hong Kong
Red Chips State-owned Chinese companies incorporated outside the mainland and traded in Hong Kong
P-chips Nonstate-owned Chinese companies incorporated in certain foreign jurisdictions (Cayman Islands, Bermuda,
etc.) and traded in Hong Kong
N-shares Chinese companies traded in the U.S. (sometimes ADRs of H-shares and Red Chips are also
referred to as N-shares)
B-shares Chinese companies incorporated in mainland traded in Shanghai in USD or Shenzhen in HKD (open to foreign ownership)
Note: Some companies float different share classes on different exchanges.

 

Interestingly, many popular China ETFs aren't eligible to hold all investable shares, making their China exposure limited in scope.

If you want the broadest, most inclusive exposure to China, wouldn't you want an ETF that's eligible to hold all these investable shares?

 

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