Hello and Thank You
Cindie and I have several friends and former coworkers who either immigrated from China or who were the children of immigrants. During the time Cindie and I were involved with the Chinese Christian Church in the Milwaukee area, I was able to learn a few Chinese words. My ear did not hear the Chinese words as they should, so I had difficulty learning and remembering Mandarin. One of the few words that I learned was “hello”: Nǐ hǎo. As best as I can say it, I remember it as “knee how.” Another often-used word was “Xièxiè.” I cannot say that word well, but my Chinese friends smiled politely when I attempted to say, “Thank you.” By far, my best Chinese “investment” was in the lives of these dear people.
But what about other investments?
China Investments for Income
If I were to buy more investments in China, I would seek to invest for growth, not dividends. I do own some ETFs that have investments in China. For example, VWO (Vanguard FTSE Emerging Markets ETF) holds positions in Alibaba, Tencent, and Taiwan Semiconductor. Those three companies make up about 18% of VWO’s total assets. VWO has a decent distribution yield of about 2.7%, and because it is a Vanguard product, the expense ratio is a reasonable 0.10%. But, VWO isn’t just a China fund. It is more about “emerging markets.”
China Investments for Growth
I started to think about my light weighting of China companies and decided to do a bit of exploration on Seeking Alpha. One fund that I found is in the Wisdom Tree family. In general, when I see “Wisdom Tree” I think, “this is probably worth exploring.” The fund I discovered during my digging was CXSE. CXSE is the “WisdomTree China ex-State-Owned Enterprises ETF.” One thing I like about this ETF is that it excludes “state-owned” enterprises. I’m not certain that makes a big difference, but I always think governments usually make a big mess when they get their hands into a business.
Here is what I like about this fund: 1) CXSE has a nice weighting on consumer cyclical, communication, and the healthcare sectors. I view those as desirable in China. 2) I recognize most of the companies in the top ten. 3) The number of holdings (178) is significant for diversification but not diluted by too many companies. This provides at least a measure of focus. 4) The top ten investments make up about 47% of the total investment in Chinese companies. This isn’t surprising, because Tencent is 13.45% and Alibaba is 10.98%. 5) Of the Chinese-focused ETFs I looked at CXSE had the most reasonable expense ratio: 0.32%.
Dividends Are Not The Game
Although CXSE pays a dividend, it isn’t the focus for me. The yield is meager at 0.86%. Furthermore, many Chinese companies do not pay quarterly, so the dividend bounces around from quarter-to-quarter. Sometimes it is $0.01, or $0.05 and then it can bounce up to $0.20. This ETF isn’t a dividend story. Furthermore, the assets under management (AUM) are only $401 million. That is small. VWO, by way of contrast, is over $67 billion in AUM.
Historical Performance is Solid
When you compare CXSE with VWO it is no contest. The horse that wins the race, based on historical performance, is CXSE. But, remembering that I am a dividend-focused investor, I’m OK with this outcome. However, now I am more interested in CXSE because I would like a heavier weighting of Chinese-based companies in my portfolio.
Full Disclosure Regarding My ETF Holdings
My total exposure to China is less than 1% of our total investments. Given that 94% of our investments are in North America (US and Canada), and I hold about 3% in cash for opportunistic buying, you can see that my Chinese fortune is tiny. Most of it is the result of owning VWO and VEU. VEU is “Vanguard FTSE All-World ex-US ETF.” VEU, however, is much more diverse and holds over 3,400 different companies in the world.