Accessing China???s Top 50 Companies

This week???s ETF Talk covers iShares China Large-Cap ETF (FXI), an exchange-traded fund (ETF) that focuses exclusively on large companies in China — a quickly rising emerging market country with a gross domestic product (GDP) growing at an annual rate of 9-10% for the last decade.

Since its inception in October 2004, FXI has delivered an annual average return of 11.4%. The fund invests at least 90% of its $3.66 billion in assets in the 50 largest and most liquid Chinese companies whose stocks are actively trading on the Hong Kong Stock Exchange.

This means that U.S.-listed Chinese mega-caps, such as Baidu, Inc., are not included in the fund. FXI is very liquid and has high daily volume. Even so, the fund???s expense ratio of 0.73% is a bit high when compared with its peers.

As far as the fund???s holdings, it carries a heavy focus on China???s financial sector, with 49.1% of its assets invested in the country’s big, state-owned banks. Other sectors the fund concentrates on include communication services, 11%, and technology, 8.5%, which are amongst the fastest-growing sectors in China. The rest of the holdings of FXI are in other sectors, including basic materials, real estate and industrials.

The fund is non-diversified. By investing exclusively in large caps that are either under government control or are of vital importance to China???s economy, however, FXI manages to sidestep much of the downside risk that small- and medium-sized companies are prone to incur. What FXI is possibly most vulnerable to are the concerns that China???s growth may be slowing.

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