The Wrong Way to Invest in China (FXI)

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May 8, 2009 8:27am NYSE:FXI

china2According to Morningstar, the iShares FTSE/Xinhua China 25 Index ETF (FXI) is not only one of the 25 most popular exchange-traded funds on the market today, it’s also the most-traded China-focused ETF. Despite the volatile Chinese market, this ETF attracted a net $3 billion of inflows in 2008.

“That’s great,” you might think. “Investors are finally realizing that China is a place where they need to be invested.” That might be true, but if so, they’re going about it the wrong way.

Seriously red tape
Some investors confuse FXI with a proper way to invest in the Chinese growth story. That just isn’t the case, for a variety of reasons.

By investing in FXI, you’re not sufficiently tapping into the entrepreneurial spirit of the Chinese people. See, FXI tracks a FTSE/Xinhua index mainly comprising state-owned enterprises (SOEs). In fact, of the top 10 holdings of the exchange-traded fund, 10 are SOEs (or are subsidiaries of SOEs, which for my purposes are one and the same).

In terms of past performance, that hasn’t been so bad. Despite the recent plunge in the Chinese markets, which has sent names like PetroChina and China Mobile down considerably, the iShares FTSE/Xinhua China 25 ETF has averaged returns of 11% per year over the past three years versus the S&P 500 — tethered to our own megacaps like General Electric (NYSE: GE) and Microsoft (Nasdaq: MSFT) — which has lost 10% a year over the same period.

But while FXI holdings like China Life Insurance and Sinopec have outpaced American counterparts like Prudential Financial (NYSE: PRU) and Devon Energy (NYSE: DVN) since December 2005, looking to the future, FXI isn’t the right train on which to hitch your China investment dreams

Full Story: http://www.fool.com/investing/international/2009/05/08/the-wrong-way-to-invest-in-china.aspx



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