China Fund FXI Soars, But Few Riding Rally

April 09, 2015

The iShares China Large-Cap Fund (FXI | B-47) is on a tear, surging more than 21 percent year-to-date on growing expectations that the Chinese government might embark on fiscal easing in the coming months. ETF investors have yet to jump into the rally, but jump in they might.


FXI is the largest and most popular China ETF in the market today, with more than $6 billion in assets. Its focus on China’s largest companies listed in Hong Kong resonates well with U.S. investors looking for exposure to China’s large-cap segment.


So far this year, demand for that type of exposure has been muted, to say the least—FXI has actually bled a net of $188 million in assets even as it rallied. The outflows could be a reflection of widespread aversion for emerging market exposure in general following two years of significant underperformance relative to U.S. stocks. 


In fact, FXI has not been alone in its struggle to attract investor dollars. Some broad emerging market ETFs where China is the largest holding have also faced outflows year-to-date. The iShares MSCI Emerging Markets ETF (EEM | B-99) has seen $2.9 billion in net redemptions so far this year, while the Vanguard FTSE Emerging Markets ETF (VWO | B-85) has bled $374 million. But all that could be changing. 


Changing Picture

China’s finance minister said earlier this month that fiscal policies aimed at deleveraging the highly indebted country could be in the cards this year, as the country looks to prevent its slowing economy from stalling completely, according to Reuters.


If five-plus years of Fed monetary easing has taught us anything, it’s that equity markets like easy money policies. FXI’s ongoing rally seems to be another testament of that, and if policies do take hold in China, investor assets could soon follow the burgeoning rally in equities there.



Last fall, Tyler Mordy, president and co-chief investment officer of Hahn Investment Stewards, was already calling for a bull market in China for three main reasons: First, because widely advertised “crashes” rarely actually show up; secondly, because much of China’s slowdown has been coordinated by policy; thirdly, because China’s A-share market was “priced for systemic collapse.”


“All of the above is still in place,” he told today. “Perhaps more importantly now, monetary policy has turned highly stimulative. This is always good for stock markets. And China, like many other Asian countries, has entered a triple-merit scenario of falling interest rates, stable currencies and rising asset prices.”



Trading Activity Could Suggest Flows To Follow

From a trading perspective, activity in FXI suggests investors who have been somewhat absent from the rally might be waking up to the opportunity, says Paul Weisbruch, VP of ETF/options sales and trading for Street One Financial. Pointing out that trading volume in FXI has nearly tripled normal levels in recent days, he says that if that rally lasts, assets might start to flow in.


“One missing piece thus far for FXI has been inflows—in spite of the price action higher—but this picture may change quickly in the short term, especially if China equity strength does not fizzle and volatility remains relatively low in the space compared to other segments of emerging markets,” he added.


There's also a view that the recent widening of the spread between mainland Chinese equities, also known as A-shares, and Hong Kong-listed stocks could be fueling some of the upside in FXI, and the uptick in trading activity. Investors may be rotating from one type of exposure to the other.    


Consider that in the last 12 months, the Deutsche X-Trackers Harvest CSI 300 China A-Shares ETF (ASHR | D-53), which invests exclusively in A-shares, rallied nearly 89 percent. That's almost twice as much as FXI gained in the same period, as the chart below shows.  



The Alibaba Angle

Other ETFs that offer access to one of the hottest Chinese stocks—Alibaba—are also starting to gather critical mass, even if they have yet to become “household names,” Street One’s Weisbruch notes.


FXI does not currently have exposure to Alibaba, but KraneShares CSI New China ETF (KFYP | D-25) and the KraneShares CSI China Internet ETF (KWEB | B-22) each allocate roughly 11 percent and 8 percent, respectively, to BABA. The Renaissance IPO ETF (IPO | A-50) has Alibaba at nearly 10 percent of the portfolio.


Trading is picking up pace in these funds as they perform well, even if asset flows remain nothing to write home about. But that could soon change as more ETF investors take notice of these funds, Weisbruch says.


Charts courtesy of



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