Thursday, November 15, 2012

Congratulations to Xi Jinping, China’s new Communist Party leader.  Many analysts say China is now more capitalist than the USA and readers of this space know that Quant has been very fond of the big two China ETFs, so fond that we thought a deeper dive into these funds is called for.  The iShares FTSE/Xinhua China 25 Index Fund (FXI) leads the pack in 1st place again; it knocked out the SPDR S&P China Fund (GXC) which dropped 2 places into 3rd today.  Both have been bouncing around those top positions since early September.  That’s about the time the US market peaked but these two kept on rising from multi month lows established in the summer.  Its name tells us that FXI has 25 constituents so it is concentrated by nature.  The top three positions account for almost 30% of the fund that has 75.8% exposure to China and the remaining 24.2% to Hong Kong.  GXC is more diversified with 211 constituents and the same top three as FXI, but here they account for about 20% of the fund.  GXC is also more geographically diversified with a 45.9% China weighting, 19.9% in Hong Kong and 17.5% in other countries, so FXI is more of a China pure play.  Although both have the same top three constituents, there are some differences beyond that.  GXC has 22.1% in banks to FXI’s 40.4%, Energy is GXC’s second largest weight at 12.2% to FXI’s 15% and third largest; and Telecomm accounts for 10% of GXC and 16.5% of FXI.  All this information is easily readable on each fund’s tear sheet. 

Looking at their charts we see that each one has been coming down in the worldwide selloff since the US election.  That selloff has seen the S&P500 lose 5.1% since a minor top on November 6th, both funds saw a top on that same day and have come down by 5.6% for GXC and 6.2% for FXI.  We often say that Quant has a proven ability to identify intermediate term outperformers but not necessarily short term trades.  Since these funds first appeared in the top ranks in early September their intermediate term performance has been stellar.  Both saw a minor top on September 14th when the S&P 500 made its last top and even though they got sucked into the recent correction they are still positive since that date with GXC up by 2.2%, FXI up by 1.6% and the S&P 500 down by -7.5%. So you can see what we mean about intermediate term outperformance.  Quant says these two funds should continue to outperform which is why they get such strong Diamond ratings.   FXI gets all 10 Green Diamonds and carries a Risk Rating of 4.24 Red Diamonds, GXC’s split suggests slightly less reward with more risk at 9.7/5.66.  GXC’s better performance since the recent tops accounts for its higher Technical Score but FXI wins the Sentiment Score and the combined Behavioral Score.  GXC also beats FXI on the Fundamental Score but its geographic distribution is in countries ranked lower than China, advantage FXI again.  FXI’s 25 constituents can’t compare to GXC’s 211 so the latter gets the higher Quality Score despite its lower liquidity rank.  All the dozens of daily measurements that go into these scores and ratings give a slight advantage to FXI today but suggest both funds are still among the best places to allocate your equity exposure.  Quant has been right so far and our congratulations go out to China on its strong stock market as well as its new leader.

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