Avoid China's Potential Bank Crisis By Avoiding These ETFs
For all the talk of Europe's sovereign debt and the adverse impact it is having on European and U.S. banks, there might just be another country with serious problems in its banking industry that investors need to be aware.
Unfortunately, we're not talking about Costa Rica or Mongolia. We're referring to China, the world's fastest-growing major economy and home to some of the world's largest banks by market value.
A Bloomberg Poll released earlier this week that a majority of global investors feel China will face a banking crisis in the next five years. It wasn't a slim majority either.
Sixty-one percent of respondents said they anticipate a crash in the financial industry by late 2016, and only 10 percent were confident China's banks will escape trouble, according to the Bloomberg poll, which surveyed nearly 1,100 respondents.
There has been plenty of talk lately that Chinese stocks are undervalued and ETFs have been a credible option for accessing Chinese equities, but investors might do well to avoid these ETFs with heavy allocations to China's financial services sector.
iShares FTSE China 25 Index Fund (NYSE: FXI) We'll start with the biggest of all China-specific ETFs because with almost $6.6 billion in assets under management, that's exactly what the iShares FTSE China 25 Index Fund. FXI usually acts just fine when there's a bull market for Chinese equities, but there's a big problem with this ETF under the potential banking crisis scenario: Nearly half of FXI's sector weight is devoted to banks. In other words, this isn't the place to be avoid Chinese banking calamity.
SPDR S&P China ETF (NYSE: GXC): Almost five years old and home to nearly $6.2 billion in AUM, the SPDR S&P China ETF doesn't get the press that FXI does, but it's still one of the big boys at the China ETF party. Problem is a lot of that heft is tied up in financials. Four of the ETF's top-10 holdings are financial services firms and the sector accounts for almost 32% of the ETF's weight. Take a pass.
iShares MSCI China Index Fund (NYSE: MCHI): In an effort to give MCHI some credit, we should tell you that its $50 million in AUM following a March debut in a bad environment for Chinese stocks is impressive. Home to 150 stocks, MCHI has four financials in its top-10 holdings and the sector accounts for a way-too-much 35.16% of the fund's weight. MCHI has been decent so far for a new China ETF, but a banking crisis would hurt this fund. There's no doubt about that.
Guggeneheim China Small-Cap ETF (NYSE: HAO): For most of 2010, our prediction that HAO would be a better bet than FXI was proven accurate and a central part of that thesis was HAO's dramatically lower exposure to financials. With 200 stocks, HAO's weight to financials is “just” 12.1%, but that's enough to make the sector the fourth-largest within the ETF. Chinese small-caps of any stripe would likely be harshly repudiated under the banking crisis scenario and that alone makes HAO potentially vulnerable.
Bull case: Obviously it would be that China skirts a banking crisis altogether. The time frame for it happening, five years, is pretty big so there easily could be some time in there that owning any and all of these ETFs makes sense. Fingers crossed.
Bear case: There's no arguing with the statistics. The only member of this list that has a remote possibility of not seeing significant percentage declines if China gets its own banking crisis is HAO and even that's a tough bet to make. The others might want to lower their weights to Chinese banks sooner rather than later.
(c) 2013 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.