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Selecting the right ETF can be
daunting for those new to passive
investing. With little consistency
in terms of naming convention and
differences between physically
replicated and synthetic funds,
as well as short and leveraged
products, some may find themselves
dissuaded from investing in what is an
increasingly popular asset class.
However, the adoption of a few key
steps in the selection process can
make things considerably easier:
FIRST, FIND THE RIGHT INDEX
One of the most common mistakes
people make when choosing an ETF is
simply looking at what it says on the
tin and figuring that’s good enough.
If a fund says it’s a ‘China’ ETF, it must
give good exposure to China, right?
Not exactly.
Two funds that both claim to provide
exposure to China … or Auto … or
Gilts … may sound similar, but if you
dig underneath the surface, you’ll
find wildly different portfolios (and
therefore get wildly different returns).
Consider two of the most popular
China ETFs listed in the US: the
iShares FTSE China 25 ETF (FXI) and
the PowerShares Golden Dragon
China Portfolio (PGJ). Both funds are
well-established, with 10+ year track
records.
FXI has more than $5 billion invested
in it, while PGJ has $250 million; in
the past month alone (through 10th
October 2014), FXI has outperformed
PGJ by more than 5%.
What gives? The two funds have
different takes on ‘China,’ that’s what.
FXI owns mostly large, government-
owned financial and energy
companies, with established business
lines and defensible profits. It is 52%
invested in banks and has a weighted
average market cap of $114 billion. In
other words, it’s a defensive portfolio.
PGJ, in contrast, only holds stocks
in companies listed on the New York
Stock Exchange that do the majority of
their business in China.
It is 43% invested in Technology, with
just a 5% weight to banks. Its average
market cap is $34 billion. It’s designed
for the more aggressive China
investor.
Is it any wonder these two ‘China’
ETFs performed so differently?
The choice of index and the portfolio it
providers trumps all other choices, so
look here first.
MATT HOUGAN
PRESIDENT – ETF.COM
REBECCA HAMPSON
EUROPEAN EDITOR – ETF.COM
THERE ARE OVER 1,300 EXCHANGE TRADED FUNDS (ETFS) LISTED ON EUROPEAN STOCK EXCHANGES, AND
COUNTLESS MORE LISTED OVERSEAS WITH A WIDE VARIETY IN TERMS OF HOW FUNDS ARE INVESTED AND
STRUCTURED. MATT HOUGAN AND REBECCA HAMPSON OF ETF.COM CONSIDER HOW TO FIND THE RIGHT
FUND TO SUIT YOUR NEEDS?
PASSIVE INVESTMENT - ACTIVE SELECTION
