Chinese stocks took a beating these last few weeks.
Yet, the performance of China related ETFs weren’t uniform.
In fact, they varied substantially.
Why?
Because some invested more in mainland China while others invested in Hong Kong.
We covered three key ETFs to help explain this situation.
Because understanding the difference is crucial to navigating these markets.
And based on our TrackstarIQ Data, institutional advisors want to know what’s up.
The nexus event
Stocks like Alibaba (BABA), TAL (TAL), and JD.com (JD) got obliterated as China’s government cracked down.
That sent iShares China Large-Cap ETF (FXI) plummeting almost 30% from its yearly highs.
At the same time, Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR) was only off 22.5% from the yearly highs.
And the iShares MSCI Emerging Markets ETF (EEM) saw a drop of 14.5% from the highs, which is quite a lot given its diversification.
Why was the performance so different among these ETFs, especially between the two China-specific ones?
iShares China Large-Cap ETF FXI
FXI is one of the most popular Chinese ETFs out there. It’s one of the oldest China-focused ETFs out there.
But…it holds stocks listed on the Hong Kong exchange.
Remember, Hong Kong operates (allegedly) as a semiautonomous region that left British rule in the late ’90s.
That’s why you see stocks listed here such as Alibaba (BABA), JD.com (JD), and Tencent Holdings.
These companies are very different from the ones that trade on the Shanghai and Shenzen Stock Exchanges.
And with a heavy focus on technology, nearly a third of the index sits right in the crosshairs of regulators.
Xtrackers Harvest CSI 300 China A-Shares ETF ASHR
On the other hand, the ASHR invests in the 300 largest and most liquid Chinese shares traded on the Shanghai and Shenzen exchanges.
That means you’re getting exposure to companies more directly under the purview of the Chinese government.
And it’s a big reason why we didn’t see shares plummet as far.
In fact, the makeup of this ETF is completely different.
While it holds some exposure to Hong Kong, more than 70% is directly related to mainland China. Plus, technology only makes up 13% of the total holdings.
iShares MSCI Emerging Markets ETF EEM
As should be somewhat obvious, the EEM invests in a basket of emerging markets including both China and Hong Kong.
However, it includes other countries such as South Africa, Mexico, and India.
What’s important to know is that nearly a third of the ETF has direct exposure to Hong Kong with only 6.5% related to China.
Plus, over 36% of the companies fall into the tech sector.
Our hot take
Know the difference between these ETFs.
Some country ETFs might hold similar stocks.
These do not.
And for investment purposes, you should consider Hong Kong as a separate country from China.
Questions from your client
- How far will China’s government go?
- Can we invest in emerging markets or Asian-specific ones without China?
- What other countries are impacted by their government’s actions?
- Are there other emerging markets that offer similar growth prospects with less governmental risk?