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FXI And EWJ: Two Overrated ETF Giants

December 26, 2012
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Last week, I called out 10 overlooked ETFs that I thought deserved more assets. This week, I want to focus on a couple of Asian ETF giants that I think are among some of the most overrated funds in the industry.

The two ETFs I’m referring to are the iShares FTSE China 25 Index Fund (NYSEArca: FXI) and the iShares MSCI Japan Index Fund (NYSEArca: EWJ). Thus far, these two ETFs have become the de-facto ETF plays for investors wanting exposure to the world’s second- and third-largest economies.

Not surprisingly, both of these funds were first-movers into their respective pockets. Today, many investors continue to pile assets into them based on their popularity, but it is time to reexamine whether they’re really the best of the bunch, or simply overrated.

FXI

Let’s first start with the $7.9 billion FXI, because this fund probably tops my list of all overrated ETFs.

I understand why there was so much excitement over FXI when it launched in 2004. It was, after all, the first China focused ETF available to U.S. investors, but that was eight years ago.

Chinese markets have come a long way since 2004, and so has the China ETF landscape. Since then, more than 20 China ETFs have launched, most of which provide broader exposure to the Chinese equity markets than does FXI.

The biggest issue with FXI is one of scope. It’s strictly a large-cap fund that holds only 25 names traded in Hong Kong, most of which are state-owned financial, energy and telecom companies.

But the real roadblock here is that it’s only eligible to hold H-shares and red chips.

This means FXI misses out on Chinese mega-cap P-chips, like Hong Kong-listed Tencent Holdings, and U.S.-listed N-shares like Baidu (although starting March 2013, FXI will be eligible to hold P-chips due to a recent FTSE reclassification of P-chips).

I do want to make it clear that FXI is not a bad fund.

It does what it’s supposed to do—that is, track the FTSE China 25 Index. For institutions concerned about liquidity, FXI is also a no-brainer—the fund is a liquidity beast, trading on average, almost $600 million a day and over 100 creation units.

But for retail investors looking for the broadest exposure to Chinese equities, a fund like the SPDR S&P China ETF (NYSEArca: GXC) makes more sense. While GXC has over 200 holdings across all cap-sizes, the real key here is that it’s eligible to hold all investable Chinese shares.

To me, GXC is the current the SPDR S&P 500 ETF (NYSEArca: SPY) of China ETFs. Meanwhile, I’m not even sure I would consider FXI to be the equivalent of the SPDR Dow Jones Industrial Average Trust (NYSEArca: DIA).

In the coming years, as China continues to open its markets, I expect newer and even more comprehensive China ETFs to launch from various issuers. If there’s one market out there that investors should keep an open mind on, it’s China.

So, investors should stay tuned.

 

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