Why Brian Reckons This China-Focused Fund Will Be A Long-Term Winner

Why Brian Reckons This China-Focused Fund Will Be A Long-Term Winner

over 2 years ago3 mins

Summary:

  • China’s share of the global economy is likely to grow in the next few years, which is likely to boost the nation’s stock markets
  • This exchange-traded fund (ETF) lets investors track Chinese shares, while excluding those lumbering government-backed firms that have historically held the market back

What’s the pitch?

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. 

What does this ETF do?

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. 

What’s your three-point investment thesis?

  • Many portfolios are underweight China. Some investors focus 100% on US stocks, but even those who use global market trackers will often end up with less than 5% of their money in Chinese shares.
  • The ETF is listed in the US and has a relatively low expense ratio of 0.32%. It covers Chinese shares listed in Hong Kong (e.g. Tencent) and the US (e.g. Alibaba), as well as those listed on the mainland (e.g. Gree Electric).
  • It specifically excludes SOEs that have dragged down the returns of standard market-cap weighted ETFs – plus it arguably tracks China’s real economic growth prospects more closely.

What are the key events you’re watching?

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. 

What’s the upside potential if your thesis is right?

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. 

What are the big risk factors you’ve spotted, and how do you plan to mitigate them?

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. 

What’s your take on Brian’s pitch? Send you thoughts our way here.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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