The Average ETF Investor May Be Underweight China

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China has enacted financial reforms to help open up its markets to the global community, raising the exposure of Chinese equities in emerging market indices, but most exchange traded fund investors may still be underallocated to this market country.

"You have new China and old China, and you want to get all China. I think making sure you get part of that new China as part of the portfolio is important," Jeremy Schwartz, Director of Research for WisdomTree, said in a note.

Considering the global market capitalization breakdown today, a global market portfolio would look something like 50% U.S., 40% developed international and 10% emerging markets. Given this float restrictions enacted by Beijing, China is only about 3% of that total global weight. However, when thinking about China's total size, which includes all state ownership, Chinese equities could make up 15% of a global portfolio if the country fully opened access to foreign investors.

"You probably should have more China than 3% in terms of a global market portfolio," Schwartz said. "Getting that total representative China exposure with new China in addition to old China is really an important part of how to get access to that part of the market."

Michael Orzano, S&P’s senior director of global equity indexes, pointed out that when investors think of Chinese equity market exposure, many are looking at offshore shares, particularly those listed in New York, which largely include technology companies. On the other hand, those listed onshore, or more commonly known as A-shares, are more heavily concentrated in banks and financial institutions.

"So, it’s really important to have that total comprehensive look at China," Orzano said.

To gain a more comprehensive picture of the overall Chinese equity market, investors may look at something like the recently launched WisdomTree ICBCCS S&P China 500 Fund (NYSEArca: WCHN).

The ICBCCS S&P China 500 Fund tries to reflect the performance of the S&P China 500 Index, a group of 500 of the largest, most liquid Chinese companies by market capitalization and one of the only broad-based indices with exposure to all Chinese equity share classes, listed both in mainland China and internationally.

Due to its more diversified exposure to Chinese equity share classes, the fund’s sector weights may also be more diverse, compared to other China-related indices and funds. Specifically, WCHN top sector weights include financials 25.7%, information technology 21.5% and consumer discretionary 11.9%.

"With the S&P China 500, the main goal was to create an index that would be representative of the complete Chinese equity market. First of all, from a completeness standpoint, that’s important. But possibly even more important is that there are material differences in the types of companies that are listed in different locations," Orzano added.

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