iShares China ETF: An Opportunity To Invest In Large-Capped Equities In China – iShares China Large-Cap ETF (NYSEARCA:FXI)

Investment Thesis

iShares China Large-Capped ETF (FXI) is a great way to invest in China, the world’s largest emerging market. With China’s fast growing economy, this ETF has the potential to bring higher return to its investors. However, investors should exercise caution as China’s market is much more volatile.

ETF Overview

As the ETF name suggested, iShares China Large-Capped ETF has a portfolio that focuses on China’s large-capped stocks that trade on the Hong Kong exchange. It closely tracks FTSE China 50 Index. As of August 24, 2017, FXI has a net asset of $3.4 billion. Its Management Expense Ratio is 0.74%. The ETF has a good liquidity as its 10-days trading average is 19.4 million shares. During the most recent fiscal year, its portfolio turnover ratio is only about 15%.

Since China is an emerging market, its stock prices tend to be more volatile from time to time than developed markets. In addition, its stock prices tend to be influenced by government policies as well. Moreover, political tensions between China and its neighboring countries may add more risks as well.

Sector Distribution and Top Holdings

FXI’s portfolio consists of 51 Chinese companies. In terms of sector distribution, 52.76% of FXI’s portfolio assets consists of stocks from financial sector. The second and third largest sectors in the ETF’s portfolio are energy and telecommunication services. Each consists of 10.95% and 10.65% of FXI’s portfolio respectively.

Source: iShares Website

FXI’s top holding is Tencent (OTCPK:TCEHY), the company that currently operates the most popular social media app in China, WeChat. It is the only technology company in the ETF. WeChat is China’s version of WhatApp. Tencent’s WeChat allows instant messaging and voice calls. However, WeChat has more functions such as booking taxis and buying movie tickets. It even allows users to manage their wealth. Tencent’s market share and revenue have been growing significantly in the past few years and is poised to more growth in the future.

Eight of the top 15 holdings of FXI are from financial sectors. They include banks, insurance companies, and wealth management companies. As China’s economy continue to expand, companies’ profits are expected to continue to grow significantly.

Company Name

Weight (%)

Sector

TENCENT HOLDINGS LTD

9.95

Information Technology

CHINA CONSTRUCTION BANK CORP H

8.73

Financials

CHINA MOBILE LTD

7.6

Telecommunication Services

INDUSTRIAL AND COMMERCIAL BANK OF

7.24

Financials

PING AN INSURANCE CO OF CH

5.17

Financials

BANK OF CHINA LTD H

4.95

Financials

CNOOC LTD

3.53

Energy

CHINA LIFE INSURANCE LTD H

3.51

Financials

CHINA PETROLEUM AND CHEMICAL CORP

3.17

Energy

CHINA OVERSEAS LAND & INVESTMENT L

2.59

Real Estate Management & Development

PETROCHINA LTD H

2.59

Energy

CHINA MERCHANTS BANK LTD H

2.56

Financials

CHINA PACIFIC INSURANCE LT

2.42

Financials

AGRICULTURAL BANK OF CHINA LTD H

2.36

Financials

Top 15 Holding of iShares China as of Aug. 23, 2017 (Source: Created by author)

Performance and Valuation

Chinese stock markets tend to exhibit higher risk than developed markets. As the chart below shows, a $10,000 investment in October 2004 can quadruple in 3 years. However, this investment can also lost 75% in a short span of one year from October 2007 to October 2008.

Source: iShares Website

FXI has an average annual return of 8.62% since its inception. As China just been through a stock market crash in 2015, its average annual return in the past 3 and 5 years are only 4.78% and 5.82% respectively. However, its stock market appears to show some signs of recovery lately with a return of 18.91% in the past 1 year.

Source: iShares Website

As the table below shows, FXI has a P/E ratio of 12.90x. When compared to iShares Core S&P 500 (IVV)’s 21.65x, FXI’s 12.9x is significantly less. Similarly, FXI’s P/B ratio of 1.45x is even less than IVV’s 3.1x. Both PE and PB ratio indicates iShares China Large-Capped ETF is relatively cheap compare to S&P500. If we use S&P500’s historical mean PE ratio of 15.66x to compare, FXI’s 12.9x is undervalued. FXI’s PB ratio is also less than S&P500’s historical mean PB ratio of 2.74x.

As of Aug. 23, 2017

iShares China Large-Capped (FXI)

iShares Core S&P 500 (IVV)

P/E Ratio

12.90

21.65

P/B Ratio

1.45

3.1

12-month trailing yield

2.03%

1.83%

Source: iShares Website

Investor Takeaway

FXI is a great vehicle for investors to invest in the largest emerging market in the world. When compare to S&P500, FXI is relatively cheap. While this may imply the potential of higher return, investors need to be aware of the high volatility of Chinese markets and the risks associated. Investors should exercise caution and avoid chasing the market.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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