A Fundamental Approach to China ETFs

ETF Trends

Bolstered by a string of strong economic reports, ETFs tracking China have rallied in recent weeks. Predictably, that has put the spotlight on the iShares China Large-Cap ETF (FXI) . FXI, the largest and most heavily traded China ETF, has delivered with a surge of about 19.2% since July 1.

Other China ETFs have participated in that upside, too. With the world’s second-largest economy looking steady and stocks there still considered cheap compared to the broader emerging markets arena, investors may want to evaluate other China funds in addition to FXI. That list should include the First Trust China AlphaDEX Fund (FCA).

FXI is frequently criticized for its substantial allocations to the financial services sector and state-controlled companies. The ETF is also criticized for holding just 27 stocks, a number that many investors think is far from accurately reflective of the massive and diverse Chinese economy. [China ETFs With a More Diversified Approach]

FCA takes a noticeably different approach to Chinese stocks. Finacials are the ETF’s largest sector, but the allocation is just 17% compared to almost 53% for FXI. Importantly, FCA follows the framework used by First Trust’s successful AlphaDEX sector ETFs, a lineup that includes the $610.5 million First Trust Consumer Staples AlphaDEX Fund (FXG) and the $330.9 million First Trust Technology AlphaDEX Fund (FXL) . [Chart of the Day: AlphaDEX Methodlogy]

The AlphaDEX methodology includes a focus “on growth factors including three, six and 12-month price appreciation, sales to price and one year sales growth, and, separately, on value factors including book value to price, cash flow to price and return on assets,” according to First Trust.

This creates palpable, though potentially advantageous differences for FCA compared to rival China ETFs. For example, FCA’s 50 holding have a median market cap of $4.5 billion compared to $17.65 billion for FXI. That means FCA is not only significantly less exposed to state-controlled companies than cap-weighted China ETFs, but the First Trust offering also gives investors more exposure to stocks with better medium-term upside due to the AlphaDEX screening methodology.

FCA is also more diverse at the sector as five groups combine for about two-thirds of the fund’s weight. Financials and telecom combine for over two-thirds of FXI’s weight. FCA is up 13.5% since July 1, a performance that lags FXI, but there have been times when FCA has been the leader, including the fourth quarter of 2012 when China ETFs rallied.

FCA debuted in April 2011 along with several other international AlphaDEX funds, including ETFs for Brazil and Japan.

First Trust China AlphaDEX Fund

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ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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