ETF Talk: These Chinese Red Chips are Really Blue

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.

China’s astonishing growth in Gross Domestic Product (GDP) during the past several years has been driven in no small part by infrastructure investment, economic liberalization and rising living standards. As China has de-regulated its banking and investment sectors, opportunities continue to abound for Chinese and foreign investors alike. One way to dip your toe into this market is via the iShares China Large-Cap ETF (FXI).

This fund attempts to match the price and yield performance, before fees and expenses, of an investment fund focused on the largest and most liquid 25 Chinese companies traded on the Hong Kong Stock Exchange. These companies operate in mainland China and include red chips (Chinese companies incorporated outside China), p chips (Chinese companies incorporated in the Cayman Islands, Bermuda and the British Virgin Islands) and H Shares (companies incorporated inside mainland China).

FXI is down 5.63% for the year, following a drop in July. This dip presents an opportunity for investors to make a market-recovery play. After a similar slip in July 2012, the fund finished the year up by 16%. FXI’s dividend yield is 2.49%.

FXI_102313

FXI invests most heavily in financials, 55.4%; telecommunications, 16.09%; and oil & gas, 12.11%. The top 10 holdings make up 60.16% of its portfolio. Companies in this top 10 include China Mobile Ltd, 9.6%; Chinese Construction Bank H Shares, 8.92%; Industrial & Commercial Bank of China H Shares, 7.86%; Tencent Holdings Ltd, 7.55%; and Bank of China, Ltd H Shares, 6.07%.

The largest Chinese banks in FXI’s holdings are state-owned. These commercial banks are integral to the Chinese economy and they should continue to see tremendous investment growth, even if the overall Chinese economy slows and normalizes at less spectacular GDP growth rates. iShares China Large-Cap ETF (FXI) is essentially an investment in Chinese blue chip stocks.

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