China ETFs: A New Generation of Funds Replace FXI
FXI Flows Since GXC’s Launch: -$3.2B
GXC Flows Since Launch: $517M
MCHI Flows Since Launch: $960M
The iShares China Large Cap ETF (FXI | B-51) was the first China ETF to launch and is still by far the largest, with $4.71 billion in assets. But it’s never been a favorite of mine. The fund only holds 25 mostly government-supported mega-caps in China, largely ignoring the fast-growing consumer and technology sectors.
FXI succeeded because it was first to market. But in early 2007, State Street Global Advisors launched the SPDR S&P China ETF (GXC | B-40), the first ETF to provide comprehensive exposure to Chinese stocks. It took some time, but GXC finally caught on. Since it launched in March 2007, GXC has pulled in $517 million in net new assets, even as FXI has lost $3.2 billion in outflows. GXC is our Analyst Pick in the China segment.
Interestingly, China ETF innovation hasn’t stopped. iShares itself launched an improved China ETF in 2011—the iShares MSCI China ETF (MCHI | B-40)—and it has done even better, pulling in $880 million in assets. Investors like it because it tracks an MSCI-based index, which means it fits in seamlessly with other parts of an international ETF portfolio.
More recently, Deutsche Bank came to market with an ETF (the db X-trackers Harvest MSCI All China Equity Fund (CN)) that is the first to combine stocks from mainland China with those listed in Hong Kong and other foreign locations (where FXI, MCHI and GXC draw their components). CN is arguably the most comprehensive China ETF out there. It will be interesting to see if it, too, gathers assets at the expense of the old guard funds.
Frontier Markets: FM Getting All the Love
FRN Flows since Sept. 13, 2012: -$35M
FM Flows since Sept. 13, 2012: $702M
The Guggenheim Frontier Markets ETF (FRN | D-19) was the first frontier markets ETF to come to market, and for a while, it gathered significant assets. From its launch in June 2008 through Sept. 13, 2012, it pulled in more than $160 million in net inflows.
But iShares launched the iShares Frontier Markets ETF (FM | C-93) last September, and since then, the flows have been one-sided: FM has garnered $702 million in net flows, while FRN has lost $35 million in outflows.
Investors favor FM because it gives much purer exposure to frontier markets than FRN. Despite the name, the majority of FRN’s portfolio is invested in emerging markets, not frontier countries, led by a 41 percent allocation to Chile. FM is 100 percent allocated to frontier countries and has less concentration risk, with its largest single-country exposure (Kuwait) standing at slightly more than 20 percent.
There are plenty of other examples out there; this blog could easily have been 4,000 words. But this makes the point: Investors are taking the time to reach past the most familiar ETFs and search out the best. And that’s exactly what they should do.
At the time this article was written, the author held no positions in the securities mentioned. Contact Matt Hougan at [email protected].