After 3 Days, This ETF is Already Relevant
It is often said that new ETFs should not be treated as initial public offerings for hot stocks. In other words, traders and investors do not need to be involved on an ETF's debut day. Most new ETFs provide neither a sequel to Facebook's (NASDAQ: FB) infamous debut nor a repeat of Trulia's (NYSE: TRLA) impressive first day surge.
Many experts and pundits advise investors to wait an unspecified amount of time before getting involved with new ETFs. They say these rookie funds need to become "seasoned" as if a new ETF is participating in a barbecue competition.
Everyone is entitled to their own opinion, but the fact is the WisdomTree China Dividend Ex-Financials Fund (NASDAQ: CHXF) is less than 72 hours old and has already proven to be a relevant concept.
In its quick ascent to relevance, the WisdomTree China Dividend Ex-Financials Fund got some help and it is news that could eventually weight on rival funds such as the iShares FTSE China 25 Index Fund (NYSE: FXI). Chinese banks may be paring dividends, the China Securities Journal reported.
Central Huijin Investment, a state-owned asset management company, regulates the dividends for China's major banks and has already authorized a five percent reduction to 35 percent, according to Reuters.
The glum dividend news about Chinese banks coming just days after the debut of CHXF is pure coincidence. Coincidence does not diminish the allure and relevance of this new fund because there is a strong case for avoiding Chinese financial services names.
"An equal-weighted blend of the non-financial sector indexes in China, “China ex-Financials,” had an average annual standard deviation of about 2 percentage points less than the MSCI China Index and 10 percentage points less than the MSCI China Financials Sector Index over the 10 years from June 30, 2002, through June 30, 2012," according to a note written by WisdomTree Research Director Jeremy Schwartz. That note was published earlier this week.
Amid slowing Chinese economic growth, analysts and investors have become increasingly concerned that loan default rates could spike in the world's second-largest economy. Presumably, that scenario ETFs with large weights to Chinese banks. FXI, the largest China-specific ETF, is home to just 26 stocks, but 12 are financial services names and the sector accounts for almost 53 percent of the ETF's weight.
The SPDR S&P China ETF (NYSE: GXC) allocates just under a third of its weight to financials and features four financial services names among its top-10 holdings. There is evidence to support the theory that CHXF's exclusion of bank stocks will serve investors well. Over the past five years, GXC with a lower weight to financials, has outperformed FXI by nearly 600 basis points.
The Guggenheim China Small Cap (NYSE: HAO) devotes "just" 18.6 percent of its weight to financials and since that fund debuted in January 2008, it has outperformed both FXI and GXC.
"Given that we imagine many investors may not want to take a sector bet resulting in 50% exposure in China's equities weighted directly in the financial sector, we think it makes sense to consider an alternative way of building an index for China's equities," Schwartz wrote.
The statistics and dividend headlines support the notion that when it comes to China ETFs, the lower the weight to financials, the better. That bodes quite well for CHXF's future. As it is, the fund has already attracted almost $5 million in assets.
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