ETFs for China? + Portfolio

Hi guys,
I’m looking into rebuilding my portfolio,I wanted to keep it simple, buy VT and that was it. but… I noticed China is not represented in that ETF.

Digging deeper I started looking into “emerging markets’ ETFs” and surprisingly China is almost nowere.
China is the second largest economy in the world (US 1st, Japan 3rd) how is that possible?

I used to have UBS (Lux) Equity Fund - Greater China but it had a TER of 2.4% (that’s cazy I know :tired_face:) but it performed very well.

I found some china market ETF’s but kind of shady wit (60 stocks in it) and I found thislist of China ETFs but TERs are terrible.
Then I found that Vanguard has just released a new Vanguard Total China Index ETF (3169) with a 0.4% cost.
Does anybody knows about it?
Are you invested into China?
I checked Just ETFs, ETF.com and Yahoo Finance but I couldnt find it, do you know how to search for this kind of ETF seems like there is a numbered Ticker (like the chinese stocks)

Now my idea of portfolio will look like this:

40% VTI
10% VBR
10% VSS
20% VXUS
20% China (?)

My objective is to be heavy on
US + overweighted small caps
Rest of the workd + overweighted small caps
Heavy on China

Any feedback is very welcome.

cheers!

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Much of it is private or uninvestable to foreigners, unlike US. OVerweighting the few investable shares just because GDP is IMHO dumb and defies logic, but seems frequently recommended on german forums…

The relationship between GDP growth and stock index returns is complex, in fact this quick study claims they’re negatively correlated - https://www.msci.com/documents/10199/a134c5d5-dca0-420d-875d-06adb948f578

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Burton Malkiel discusses the problem of lack of representation of China in his famous book “Random Walk Down Wall Street” and he proposes some ETFs to complement the world-cap portfolio. Here’s (in my post in another thread) a screenshot from the book:

PS1. Malkiel in recent years even worked in some startup to create an ETF providing broadly-diversified China exposure. He also did some academic research on that topic.

PS2. And here’s recommendation of @wapiti:

PS3. Here’s a nice list of China ETFs:

On IB it’s available if you put the ticker (number), i.e. 9169 for USD currency. Maybe you have to change your trading permissions before seeing it (it’s traded on Hong Kong Stock Exchange).
It’s available since may and - for the moment - it seems quite illiquid.
On Vanguard home page there are also some disclaimers on currency (The base currency of the Fund is RMB and distributions are made in RMB only. RMB is currently not freely convertible and is subject to exchange controls and restrictions. Non-RMB based investors are exposed to foreign exchange risk. The limited availability of RMB outside the PRC may affect the liquidity and trading price of RMB traded units.)
I’m also interested but I think I’ll wait for other brave forum members to “break the ice”… :grimacing:

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VT contains China (3.3%) and Hong Kong (1.2%), but it’s pretty small number of free-floating internationally available stocks. So it’s underrepresented (and poorly diversified) in comparison to China’s GDP size (15% of the world’s GDP) and it’s equity market.

You can see VT’s countries representation here:
https://investor.vanguard.com/etf/profile/portfolio/vt

GDP has not much to do with stock market capitalization

Check MSCI IMI indices for all investable stock - China IMI is only 3-4% of world, so VT’s weighting seems OK to me. Unfairly overweighting them just because private/non investable companies in same country produce more goods is illogical to me

That’s surprising, I thought China’s stock market cap will be much higher than this. I’d not want to overweight the Chinese stocks that I already have - that wouldn’t make sense. I’d prefer to diversify and complement it with an ETF that digs deeper to the stocks that are not already in VT. I have to check what is inside of these Burton Malkiel’s recommended Claymore/AlphaShares China All-Cap ETF (YAO). If it’s the same stuff that VT already has, then I’ll give up the entire exercise. My goal is to better represent world market-cap not overweight China because it has big GDP.

Well if you check this chart, it tells a different story. If you convert RMB to USD, you get around $5 trillion. Other sources, like World Bank, give a total estimate of $8 trillion. That would be 10-15% of the World.

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The difference is @hedgehog is talking about China Investable Market Index cap and you’re talking about China’s total market cap. The question is now - should we overweight IMI because rest of the Chinese market is bigger? Probably doesn’t make sense - it’s like investing more into FANG because rest of the American market is big. It would be best to invest into these other part of the Chinese market - but how? :confused:

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Yeah I would like to be invested in it as well. They just don’t let you do that. Of course, overweighing with something else is too imperfect. You just get Tencent and Alibaba and hope the rest of the Chinese Economy does as well as them.

I think I’ve found the solution to that problem - I’ll add Claymore/AlphaShares China Small-Cap ETF (HAO) to my portfolio to complement and diversify the Chinese stocks that I already have in VT. This way it’s least probable that I’ll overlap and overweight large-cap Chinese stocks that I already have in VT.

I briefly compared the holdings of the two funds:
https://www.zacks.com/funds/etf/HAO/holding
https://www.zacks.com/funds/etf/VT/holding

And it seems that they don’t have anything common.

Since you want to overweight small-caps @Mr.HdLR, I think this fund should be also good match to your portfolio.

PS. I checked YAO (all-cap) and TAO (real estate) and it seems most of them are already in VT:
https://www.zacks.com/funds/etf/YAO/holding
https://www.zacks.com/funds/etf/TAO/holding

Damn, VT is awesome. :slight_smile:

Now I need to figure out what is the % of market cap of Chinese small-cap to the world-cap, so that I know more or less how much I should put in that fund. Anybody has an idea?

I’ve noticed that Small Caps tend to be 10% of the whole market, both for the World (5 trillion vs 50 trillion) and the Emerging Markets (500 billion vs 5 trillion).

If we assume that the true (including ones you can’t buy) cap of China is 5 trillion, then it would put their Small Cap at 500 billion, or around 1% of global cap.

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Thanks @Bojack, this is indeed what my intuition was telling me - it must be around 1%.

That’s what I’m starting to realize, VT is quite of complete.

Regarding HAO seems small and not liquid ETF, it’s covering only 317 out of the 1647 companies of the benchmark.
Also, something I noticed it holds 81%Hong Kong, 18% China, while the benchmark is 15% Hong Kong, 83% China

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Ok guys, thanks for your feedback and input.
I have come up with the following portfolio with the following objectives:

  • Close to VT distribution but…
  • Overweighting US and Rest of the world Small caps.
  • Overweighting Greater China (China, Hong Kong, Taiwan) 14% of the portfolio

ETF mix:
40% VTI - US
5% VB - Small caps US
20% VT - World to get Europe Pacific, the rest
5% VSS - Small caps world
15% VXUS - Japan / Europe
10% VWO - Emerging Markets
5% 9169 - China

Total TER: 0.0955%
My concern now is that I have 7 diffrent ETFs to follow and rebalance from time to time.

Any feedback is very welcome (!)

2 Likes

Hi @Mr.HdLR, I finally took some time to dig into your data and made a reference spreadsheet myself based on yours to see how weights change after playing with the numbers…

First of all, I think there are some issues with the ETF.com data (region allocation). I noticed that when summing the % (in some cases either they don’t reach 100% or they are > 100%). These differ from the region allocation you can find on Vanguard web page for the single ETFs.

Main differences I’ve found are in:

  • VT (if you want to account separately China, Taiwan, HK and Japan you have to subtract them from EM/Pacific, otherwise you count them twice and exceed 100%)
  • VWO (China is 36.6% now and HK isn’t included here as it is part of Pacific, not EM)
  • VXUS (les weight for Europe in favour of Pacific + other differences)
  • VSS (didn’t dig in this as I’m not particularly interested in separating small caps)

See image below for details.

ETFs%20by%20geography

So it seems that China is enough represented in VWO, do you really need to add 9169 ?

I also don’t understand much the choice of “general” ETFs like VT. If you want to overweight/underweight some regions, why don’t you separate them and assign the weights you prefer, i.E.:

  • VTI (USA)
  • VGK (Europe)
  • VPL (Pacific)
  • VWO (China/Taiwan + Latam + …)

These should be all caps -> with 4 ETFs you are done. If you want to overweight small caps you can add the others, but imho 6/7 ETFs are quite a hassle to follow (commissions to buy, rebalance difficulties etc…).

Just my 2 cents.

(edit)
run a quick simulation with PortfolioVisualizer and 2 sample portfolios (one similar to your choice, except moving 9169 into VWO to get a broader period, and one with 3 ETFs). See results below (with the usual disclaimer: “past performance…:wink:)

Period: Jan. 2012 - Jul. 2018

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Hi @weirded, thanks for your feedback, i didn’t know about this website. looks pretty cool.
I ran a backtest with the portfolios + a 3rd portfolio using 100% VT
results are pretty much the same but VT would be a single ETF, so instead of managing 6 to 7 positions I would only manage 1

Overweighting small stocks seems not to have an impact on the final results.
I couldn’t simulate overweighting greater China I need to search for an available china ETF.

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Try also adding 10%-20% of gold and backtest over a longer period as an asset class
https://www.portfoliovisualizer.com/backtest-asset-class-allocation#analysisResults

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