Heaton’s piece―available in full here―examines the six Chinese equity ETFs investors can buy in Europe. The group is dominated by funds tied to the FTSE/Xinhua China 25 Index, an index of 25 mega-cap Chinese giants. Most of the companies in the index are government-controlled conglomerates. The index’s largest weight is in China Mobile, followed by China Construction Bank, China Life Insurance Company, China … well, you get the point.
The problem, as Heaton points out, is that the index is designed to buy the most liquid giants of the Chinese industrial economy, not the up-and-coming companies of tomorrow that capture the entrepreneurial spirit of the nation. But ETFs that capture a more diversified element of the Chinese economy have relatively little in the way of assets.
The same is true in the United States. In the U.S., the iShares FTSE/Xinhua 25 Index Fund (NYSEArca: FXI) has more than $9 billion in assets. The much-more diversified SPDR S&P China ETF (NYSEArca: GXC) has about $440 million. And the Claymore/AlphaShares China Small Cap Index ETF (NYSEArca: HAO) has just $171 million in assets.
Do investors really want access only to Chinese mega-caps? Or are they just buying the “dominant” China fund?
There’s no way to know for sure, but I worry that it’s more the latter than the former. And I attribute some of the blame to people like me, who don’t do a good enough job comparing ETFs so that investors can understand the differences.
Where should investors go if they want to compare and contrast China-focused ETFs in the European market? Where can you easily get sector and capitalization breakdowns? Bid/ask spread differences? Liquidity measures? It’s not immediately obvious to me.
It seems as though there is an enormous information gap associated with just the kinds of information that Heaton conveys. Because let’s be clear, the differences matter. In the U.S., the gap between the best-performing China ETF and the worst over the past year is close to 40%. In Europe, the funds are more alike, but the gap is still significant.
Will closing that information gap be enough to help investors make smarter choices? I don’t know, but it would certainly be a start.