over 2 years ago • 3 mins
A long-term asset allocation in the WisdomTree China ex-State-Owned Enterprises ETF (ticker: CXSE). Building long-term wealth relies on making regular investments, and for most people, a large chunk of those investments will be in passive stock ETFs.
But instead of counting on the US to outperform in the next 30 years like it has over the past three decades, I’m recommending that people up their allocation to the other possible economic leader: China. However, stock market returns in China have been dragged down by underwhelming performance at massive state-owned enterprises (SOEs) such as banks. Excluding those SOEs and indexing only to companies with a private ownership has provided superior returns in recent years – and will, I believe, continue to do so.
It tracks Chinese stocks listed on exchanges across the world, but with a special twist of excluding companies that are more than 20% owned by the government.
I’m watching the actions of major index providers like MSCI and FTSE Russell. These firms should, over time, increase the weighting of Chinese stocks in global benchmarks, bringing hundreds of billions of dollars into China’s markets.
As the global economy reblances away from the US and towards China over the next five to 20 years, Chinese stocks should provide the sorts of returns that their American counterparts have over the past two or three decades.
There are still significant risks that may stop China becoming a leading global economy alongside the US. While China’s growth has been very rapid since the turn of the century, there’s no guarantee it can be sustained. And within China, the pressure to switch to a more democratic system of government might become harder and harder to resist – potentially hurting growth.
I’m not suggesting that people throw everything they have into Chinese stocks, just that they should increase their allocations closer to China’s share of the global economy (eg. 10-15%). Betting your entire portfolio on any single economy – including the US – is unlikely to be the most prudent strategy for building wealth over the long term.
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