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An Enhanced New Index for Big China ETF Coming Soon

Sweta Killa

Chinese stocks have shown an impressive performance over the past one month as investors are dumping riskier assets in favor of low-risk and blue-chip companies. This is because concerns over a sooner-than-expected interest rate hike, the Russia-Ukraine standoff and escalating violence in the Middle East will continue to weigh on domestic economic growth, making investors cautious.

Among the major developed and developing countries, Chinese stocks appear very cheap at current levels after a prolonged four-year slump. This is more so in a currently lofty stock valuation ridden world. Additionally, a strengthening Chinese currency and a recovering economy are attracting huge foreign inflows into the country (read: 3 China ETFs Surging Higher).

Large caps are the most to benefit from the current market trends and will likely continue to do so going forward this year. This is especially true as these tend to be the most stable than the mid and small caps in an adverse economic scenario and also offer capital appreciation in a booming market.

Keeping the current trend in mind and investors’ increased appetite for large cap undervalued Chinese stocks, FTSE will be enhancing the 25-blue chip stock FTSE China 25 Index to a bigger 50 stock index with a new name – the FTSE China 50 Index. It will create the FTSE China 50 Migration Index in order to smoothen the transition.

According to FTSE, “the index weights of the 25 constituents added to the FTSE China 50 Index at the start of the migration process will be increased on a monthly basis after the close of business each third Friday. A migration factor is applied to the free float adjusted market capitalizations of the index constituents to adjust their index weights as part of the migration process.”

Index Change Will Diversify FXI

The index change suggests a big shift in the exposure profile of the largest and ultra-popular iShares China Large-Cap ETF (FXI), which currently tracks the FTSE China 25 Index. The fund has attracted an impressive $504.7 million in capital over the past month, propelling the total asset base to $5.8 billion. It trades in heavy volume of over 20.3 million shares per day on average. The ETF gained 8.3% over the trailing one month (see: all the Emerging Asia-Pacific ETFs here).

Currently, the fund is largely concentrated on financials, which accounts for more than half of the portfolio, while telecommunications, oil & gas and technology round off the top four with double-digit allocations. The top three holdings – Tencent Holdings, China Mobile and China Construction Bank – collectively make up for 17.6% share. FXI charges 74 bps in fees per year from investors.

Effective from September 22, FXI will track the FTSE China 50 Index. The new index looks to double the number of total holdings in the ETF and would provide a balanced approach across a number of sectors and securities, minimizing concentration risk, which is 16.76% currently.

Bottom Line

Clearly, the migration of the benchmark will provide a well-balanced superior portfolio, suggesting some change for investors. The larger number of securities and greater sector synchronization seem to be the real key. Nevertheless, the new index will continue to target the large cap segment of the Chinese equity market and also track the old 25 companies with new additions (read: Will Large Cap ETFs Continue to Surge?).

The ETF remains an interesting option for investors seeking wide exposure to the Chinese equity market. The change is coming at the right time and would allow investors to ride out the current bullish sentiments in a more diversified way.

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