Beware of China ETFs (FXI, PGJ, GXC, CHL, BIDU)

China’s main stock market index, the Shanghai Composite, finished 2013 with a modest loss of 7 percent. The country has averted a hard landing for a couple years, but the stock market has been lagging the other top economies in the world. Despite the strong growth out of China, investors continue to doubt if the country and keep up 7-plus percent growth in the future.

The largest Chinese ETF by assets under management is the iShares FTSE China Large-Cap ETF FXI. With a total of $5.7 billion of assets in the ETF, it is head and shoulders above its competition. However, its performance in 2013, a loss of 5 percent, was subpar and lagged its peers.

The ETF has a narrow focus with only 25 stocks in the portfolio and over 55 percent in Chinese financial stocks. The reason the financials make up such a large portion of the ETF is that the goal of the underlying index is to track the 25 largest and most liquid stocks available to international investors. The financials fall into this category.

On the other side of the spectrum is the PowerShares Golden Dragon China ETF PGJ with $329 million in assets under management. The ETF was a huge winner in 2013 with a gain of 58 percent. There are a total of 72 Chinese companies in PGJ, which lowers the concentration, however the big difference is the names of the top holdings.

When comparing the top ten holdings of the two ETFs, only one company is present in both portfolios. China Mobile CHL is the number three holding in FXI with a allocation of 8.2 percent and it is the eighth largest holding in PGJ, making up 3.5 percent. CHL lost 11 percent in 2013, helping FXI lag PGJ.

The majority of the stocks that make up the top holdings in PGJ are technology related. Several of the top ten holdings are either at or near multi-year highs as the technology sector in China continues to outperform. The top holding, Baidu BIDU, was up 77 percent in 2013 and was a major reason the ETF was able to post the strong gain.

Falling in the middle is the $862 million SPDR S&P China ETF GXC that gained 5 percent last year. The ETF has 31 percent in the financials and 20 percent in technology. The top holdings are not made up of the tech names similar to PGJ, but it also is not as reliant on the financial stocks. Looking ahead, GXC will likely fall in the middle between the two prior ETFs based on performance because of its more diversified approach.

When it comes to investing in China via ETFs an investor should beware of the many options and how the outcome can be greatly affected by which ETF is chosen.