Author Topic: Total China Index ETF - any thoughts?  (Read 1347 times)

Kalergie

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Total China Index ETF - any thoughts?
« on: July 06, 2018, 01:12:22 AM »
I am considering increasing my China exposure of my portfolio. Currently, I only have VXUS. I am aware that deviating from total market funds and moving towards a specific market can be perceived as market timing. But honestly, I have never been very happy with the fact that China is considered an Emerging Market when it represents the 2nd largest economy worldwide. Since May this year, Vanguard has offered a Total China Index ETF listed in Hong Kong. https://www.vanguard.com.hk/portal/mvc/detail/etf/overview?portId=9587&assetCode=EQUITY##portfoliodata

Issues I have at the moment include:
-the fund has virtually no track record
-My existing VXUS holds the largest companies from China already, yet at a much smaller percentage. So there is a degree of overlap
-MER of .4% is reasonable yet quite a lot more expensive than my average portfolio cost
-What about dividend withholding taxation from Hong Kong?
-Is there any way that the China exposure of VXUS will naturally be increased to a more representative number in the future?


Any thoughts?  Thank you!
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mjr

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Re: Total China Index ETF - any thoughts?
« Reply #1 on: July 06, 2018, 01:27:09 AM »
A communist regime, state control of industry, dubious veracity of reporting of the economy and company performance, restricted currency.

I wouldn't touch China with a barge pole.

marty998

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Re: Total China Index ETF - any thoughts?
« Reply #2 on: July 06, 2018, 03:28:11 AM »
A communist regime, state control of industry, dubious veracity of reporting of the economy and company performance, restricted currency.

I wouldn't touch China with a barge pole.

What he said. The only winner in a financial transaction with China is China.

Kalergie

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Re: Total China Index ETF - any thoughts?
« Reply #3 on: July 06, 2018, 03:33:40 AM »
Literally did not expect that type of response to be honest. :D
So let's all boycott China and do business only in countries free of guilt.
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bwall

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Re: Total China Index ETF - any thoughts?
« Reply #4 on: July 06, 2018, 05:41:02 AM »
With the impending trade war, this is the worst possible timing. Chinese stocks have been dropping for the past month, so no need to catch a falling knife.

And, I second what MJR said; non convertible currency, insecure property rights, lax reporting standards enforcement, no way I'd invest in China. There is too much money to be made elsewhere.

It has nothing to do with guilt or lack thereof, rather smart investment decisions.

MustacheAndaHalf

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Re: Total China Index ETF - any thoughts?
« Reply #5 on: July 06, 2018, 05:53:11 AM »
Literally did not expect that type of response to be honest. :D
So let's all boycott China and do business only in countries free of guilt.
When you author a new thread, you have to expect other viewpoints.  I don't think sarcasm is the right approach.

Kalergie

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Re: Total China Index ETF - any thoughts?
« Reply #6 on: July 06, 2018, 07:36:11 AM »
Literally did not expect that type of response to be honest. :D
So let's all boycott China and do business only in countries free of guilt.
When you author a new thread, you have to expect other viewpoints.  I don't think sarcasm is the right approach.
I appreciate that. Sarcasm comes out a bit too harsh in written form, for which I apologize. I may be a little less pessimistic about China than my peers here. I just find it a bit strange that China has a very small share of my portfolio despite the fact that it is the 2nd largest economy. It does not match the idea of "buying the market".
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Car Jack

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Re: Total China Index ETF - any thoughts?
« Reply #7 on: July 06, 2018, 08:14:58 AM »
Trump's trade war switch was flipped this morning at 12:01am.  Why anyone would invest in China right now is beyond me.

Radagast

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Re: Total China Index ETF - any thoughts?
« Reply #8 on: July 06, 2018, 08:55:32 AM »
I'm lust leaving after three weeks in China! It is amazing how quickly China continues to develop. In 1980 they were comparable in terms of recent political stability and economic development to the US in 1870, and now they are probably somewhere in the 1930's US but with 2010's technology (obviously a vague and not really accurate scale). On the other hand the closer they get the more apparent it becomes about how far they still have to go. There is still a huge potential for massive development everywhere for decades to come. Even as a fairly frequent international traveler I often take for granted just how developed the US is. China is very much an emerging market. When you consider that their population is 4x larger than the US, by the time their GDP equals that of the US their GDP per capita will only be 1/4 as large. Right now it is more like 1/5. (Anecdotally, my personal definition of "developed" is when the water is safe to drink out of every tap and every hospital has soap in every bathroom, and so far there seems to be no interest in at least water on their part, and not much in soap).

Basically this:
A communist regime, state control of industry, dubious veracity of reporting of the economy and company performance, restricted currency.
Many people will make lots of money in China over the coming decades, but will foreigners make more money by investing in China than they would by instead investing in the rest of the world? There is still a long way to go in terms of transparency, lawfulness, and equal treatment of foreign investors and institutions. Right now you might be buying into a great opportunity at a great time, but it is also possible you are making an unintentional charitable donation. I don't necessarily see any reason to overweight China relative to the rest of the world, but no real reason to avoid it either.

Doesn't VWO do better in accounting for Chinese companies? (a question not an answer, I thought it did but did not look it up).
« Last Edit: July 06, 2018, 09:01:17 AM by Radagast »

bwall

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Re: Total China Index ETF - any thoughts?
« Reply #9 on: July 06, 2018, 11:15:35 AM »
China is difficult to invest in primarily because they don't allow foreigners to invest there. The mainland Chinese stock market is off limits to non-Chinese. Which is ok, because their currency isn't convertible, so no need to put $100k into CHY on the Shanghai market only to *not* be able to buy your home currency once the trade/investment is sold.

Baidu, Alibaba and Tencent (BAT) are listed outside China and thus foreigners can participate in the rise of these companies, but mainland Chinese can't. It's pretty twisted.

Yahoo had a large early stake in Alibaba, but sold too song, and waaaaay too cheap. In perhaps the best investment of all time, South African company Naspers invested $32m USD in Tencent in 2001 for 48% of the company. Now that investment is worth about $150 billion. In fact, the entire Naspers market cap is less than the value of their stake in Tencent. So, if you are looking for a way to invest in China Naspers may be a great way to do this. You get Tencent at a discount, plus a share of all their other VC investments across the globe.

 

DreamFIRE

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Re: Total China Index ETF - any thoughts?
« Reply #10 on: July 06, 2018, 11:21:42 AM »
No thanks.  I already have been invested in a developing nations fund for 10 years, which hasn't done that well.

lhamo

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Re: Total China Index ETF - any thoughts?
« Reply #11 on: July 06, 2018, 01:48:06 PM »
The peak growth period for China has already passed.  A lot of the manufacturing jobs that fueled that growth have now moved to other countries as Chinese labor has gotten more expensive.  The government had originally hoped that at least part of that manufacturing would move to the inland provinces, which lag behind the seaboard significantly, but it doesn't look like it is happening -- at least not for export-oriented products.

In the next 10-20 years the focus will be more on creating a consumption-based path to growth.  Lots of service jobs, but the margins are much lower.

Add to that China's extreme lack of political and financial transparency, and I am not leaping to put more of my money there than I already have in Vanguard Total International.  We did extremely well in the Beijing property market, but I am glad we got our capital out when we did.  I bought Worldcom in 2000.  There are many more Worldcoms than Apples in the Chinese market.
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chasesfish

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Re: Total China Index ETF - any thoughts?
« Reply #12 on: July 07, 2018, 09:28:53 PM »
Person opinion - China is the next Japan, low cost manufacturing will move to its next market and the market will be stagnant for 20 years
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harvestbook

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Re: Total China Index ETF - any thoughts?
« Reply #13 on: July 08, 2018, 06:29:25 AM »
This could well be the Chinese century the way the last one was the American century. All the horrible things listed as "bad" in this thread could turn out to be good, and all of the perceived US superiority could crumble like the Dutch, Portuguese, and British did before. What if a centrally planned economy turns out to function better than one manipulated by spiteful random tweets? What if bullying bluster actually works? What if investing heavily in green technology yields better outcomes than lobbyist-driven policies and climate denial? What if one or another country wins or loses wars? I don't know for sure, so I'll just keep world-cap allocations.
« Last Edit: July 08, 2018, 06:35:31 AM by harvestbook »
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Kalergie

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Re: Total China Index ETF - any thoughts?
« Reply #14 on: July 08, 2018, 06:38:30 AM »
This could well be the Chinese century the way the last one was the American century. All the horrible things listed as "bad" in this thread could turn out to be good, and all of the perceived US superiority could crumble like the Dutch, Portuguese, and British did before. What if a centrally planned economy turns out to function better than one manipulated by spiteful random tweets? What if bullying bluster actually works? What if investing heavily in green technology yields better outcomes than lobbyist-driven policies and climate denial? What if one or another country wins or loses wars? I don't know for sure, so I'll just keep world-cap allocations.

This is what I want as well. The problem I noted was that the World-Cap funds have only a small amount of China compared to the actual share of world GDP. Why is that anyway?
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beltim

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Re: Total China Index ETF - any thoughts?
« Reply #15 on: July 08, 2018, 07:02:47 AM »
This could well be the Chinese century the way the last one was the American century. All the horrible things listed as "bad" in this thread could turn out to be good, and all of the perceived US superiority could crumble like the Dutch, Portuguese, and British did before. What if a centrally planned economy turns out to function better than one manipulated by spiteful random tweets? What if bullying bluster actually works? What if investing heavily in green technology yields better outcomes than lobbyist-driven policies and climate denial? What if one or another country wins or loses wars? I don't know for sure, so I'll just keep world-cap allocations.

This is what I want as well. The problem I noted was that the World-Cap funds have only a small amount of China compared to the actual share of world GDP. Why is that anyway?

Because they're market capitalization weighted, not GDP weighted.

Indexer

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Re: Total China Index ETF - any thoughts?
« Reply #16 on: July 08, 2018, 01:28:54 PM »
A lot of the economic data coming out of China is written by China, many third parties doubt the data is accurate, and the government has an unhealthy relationship with private industry. The accounting & business practices we expect in the west don't exist there, and if the government decides it wants the state-backed company to out perform a private company then they will make sure the state-backed company gets favorable treatment and that the private company goes under.

I once had the conversation with a corporate auditor who was sent to China to evaluate several companies on behalf of hedge funds looking to invest. He said something that really caught my attention, "I'll tell you the same things I told the hedge fund managers. With their accounting practices I can't tell which companies are Enron(cooking the books). I would just go in assuming they are all Enron, that's probably close to the truth."


This is what I want as well. The problem I noted was that the World-Cap funds have only a small amount of China compared to the actual share of world GDP. Why is that anyway?

As stated, the index funds are market cap weighted, not GDP weighted. The size the economy isn't being measured. The size of the corporations headquartered in the country is what's being measured. Not to long ago, the tiny country of Switzerland had more exposure in global markets than all of China. The reason, larger companies in Switzerland(Nestle being the big one). With a few exceptions(Tencent, Alibaba), there aren't a lot of large publicly traded corporations in China. The largest companies tend to be state owned.

jacoavluha

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Re: Total China Index ETF - any thoughts?
« Reply #17 on: July 08, 2018, 04:08:05 PM »
Why?

How much of an increase are you considering? What % of your holdings do you have allocate to VXUS now?

maizeman

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Re: Total China Index ETF - any thoughts?
« Reply #18 on: July 08, 2018, 06:23:15 PM »
...World-Cap funds have only a small amount of China compared to the actual share of world GDP. Why is that anyway?

Indexer's last point is an extremely important one. The vast majority of Chinese economic activity (all the stuff that goes into GDP) is not coming from publicly tradable companies which are open to investment by western index funds. Much of the Chinese economy is driven by State Owned Enterprises and a fair bit of the remainder by privately held firms. And finally there is the effect of foreign headquartered companies that do most of their manufacturing in China.*

What you're proposing is essentially the same logic as saying that if Bill Gates bought up AT&T, Verizon, and T-Mobile, you'd want to buy lot of extra shares of Sprint, because otherwise Wireless telecommunications would be a smaller share of your index fund investments than the Wireless telecommunications sector is of the larger economy.

*Foxconn, the people who assembly all the iPhones for apple, are a great example of this. They assemble almost half of all consumer electronics sold worldwide (with much of that work happening in China), but the company is based in Taiwan, so even though a total world index fund almost certainly owns shares of Foxxconn, they won't show up as part of the Chinese allocation of a total world index fund.

PDXTabs

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Re: Total China Index ETF - any thoughts?
« Reply #19 on: July 08, 2018, 07:18:49 PM »
What beltim, Indexer, and maizeman said.

I would add that according to Russell (FTSE Global All Cap Index ) ~3.3% of world market cap of publicly traded companies is in China. Which is why 3.2% of VTWSX is in China. I would say that keeping ~3.3% of your portfolio in China would be warranted.

EDITed to add: I think that it would make a lot more sense to just move some portion of your portfolio to VTIAX which is 6.6% China.
« Last Edit: July 08, 2018, 08:07:36 PM by PDXTabs »

Radagast

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Re: Total China Index ETF - any thoughts?
« Reply #20 on: July 08, 2018, 10:31:53 PM »
As I recall Vanguard recently increased the exposure of VWO to China because of an index change. If my fast numbers are correct, VWO includes about 10% more China exposure than VXUS does relative to its emerging markets percentage. Feel free to look up yourself.

sokoloff

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Re: Total China Index ETF - any thoughts?
« Reply #21 on: July 08, 2018, 10:46:03 PM »
Trump's trade war switch was flipped this morning at 12:01am.  Why anyone would invest in China right now is beyond me.
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Re: Total China Index ETF - any thoughts?
« Reply #22 on: July 09, 2018, 12:24:04 AM »
This is spot on "I would just go in assuming they are all Enron, that's probably close to the truth."

There is no transparency in China. The nation's debt is massive and hidden and shows no sign of improvement.  "Foreign" companies operating there have only a 49% stake and decisions are made according to Chinese, not western standards.

There is vast potential for money to be made in and around China but if you don't have intimate familiarity with the country and how it works and relevant influential figures, you are throwing cash around. Some will stick sure but most will not.

Chinese tech shows quite a bit of promise but much of that is predicated on the government keeping up social controls: blocking Facebook and other sites, creating "social credit" systems to intimidate citizens from associating with others who might harbor anti-government views.

CorpRaider

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Re: Total China Index ETF - any thoughts?
« Reply #23 on: July 09, 2018, 06:18:59 AM »
The size of the economy is but one factor in determining the return on the private equity capital in that economy.  As you know, the Chinese system is quite different with respect to the aggregation, allocation, and returns allowed on private capital. 

As for implementation, you could lean toward the WisdomTree etf that backs out the state owned enterprises (XSOE?).  I might check it out if I were going to look for an a-la carte Chinese product...but I'm not.  I'm sure Blackrock has a single country ETF for china.  Alternatively, you could overweight emerging markets pretty cheaply via like VWO or IEMG (I think the main difference is whether they treat South Korea as emerging). 

I could see one thinking that this new-era, high-value, FANG mentality, and movement in the greenback has gone too far and some of those more basic, developing-markets industries, and currencies are relatively cheap.  GMO and RAFI have published lots of stuff about it, which I have touched upon a few times on my blog.  I would probably want get some of the less communist/controlled emerging economies like maybe Brazil and India in my basket though.
« Last Edit: July 09, 2018, 08:46:04 AM by CorpRaider »

Kalergie

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Re: Total China Index ETF - any thoughts?
« Reply #24 on: July 09, 2018, 08:34:26 AM »
...creating "social credit" systems to intimidate citizens from associating with others who might harbor anti-government views.

That's Black Mirror level insanity.
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MustacheAndaHalf

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Re: Total China Index ETF - any thoughts?
« Reply #25 on: July 10, 2018, 04:13:10 AM »
I once looked at how emerging markets and US stocks did relative to each other.  Much of the time, they were far apart: US stocks swung up, emerging markets down.  Compared to most places, emerging markets seems better at diversifying US stock investments.  I might look at an "all China ETF" with that in mind: how correlated are China's ups and downs with US ups and downs?  Is an ETF with only China better diversification than using all emerging markets?

That said, China's government can pick winners and losers.  Part of the reason for the US/China trade war is how a US tech company must share it's tech with a Chinese partner, since only the Chinese partner can operate in China.  And then if the partnership dissolves, that tech can be used elsewhere in China with no compensation to the company that invented it.  Although China has recently fought corruption, they need to also deal with transparency to emerge out of emerging market status.

And maybe a rhetorical question: why pick China as the next winner instead of Taiwan or India?  Vanguard's emerging market index contains 36% China, 15% Taiwan, 11% India.

expatartist

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Re: Total China Index ETF - any thoughts?
« Reply #26 on: July 10, 2018, 09:17:26 AM »
...creating "social credit" systems to intimidate citizens from associating with others who might harbor anti-government views.

That's Black Mirror level insanity.

Yep. And the surveillance doesn't stop domestically, those lucky enough to leave are vulnerable to threats against family who remain in China
Edited to add link https://www.buzzfeed.com/amphtml/meghara/china-uighur-spies-surveillance?

alanB

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Re: Total China Index ETF - any thoughts?
« Reply #27 on: July 10, 2018, 01:15:19 PM »
If you are dead-set on it, here is a somewhat interesting article on how to diversify in China ETF's: https://seekingalpha.com/article/4175416-choose-best-china-etf-allocation-vanguards-first-china-etf.  The Vanguard fund looks interesting, whether it is worth it to invest in it vs. US-available funds depends on your tax situation I guess.

I have no idea what is going to happen in China or anywhere else in the world.  I just supplement VXUS with VSS.

Kalergie

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Re: Total China Index ETF - any thoughts?
« Reply #28 on: July 10, 2018, 02:31:42 PM »
If you are dead-set on it, here is a somewhat interesting article on how to diversify in China ETF's: https://seekingalpha.com/article/4175416-choose-best-china-etf-allocation-vanguards-first-china-etf.  The Vanguard fund looks interesting, whether it is worth it to invest in it vs. US-available funds depends on your tax situation I guess.

I have no idea what is going to happen in China or anywhere else in the world.  I just supplement VXUS with VSS.

Do you supplement VTI with VB as well?
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alanB

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Re: Total China Index ETF - any thoughts?
« Reply #29 on: July 11, 2018, 11:37:39 AM »
If you are dead-set on it, here is a somewhat interesting article on how to diversify in China ETF's: https://seekingalpha.com/article/4175416-choose-best-china-etf-allocation-vanguards-first-china-etf.  The Vanguard fund looks interesting, whether it is worth it to invest in it vs. US-available funds depends on your tax situation I guess.

I have no idea what is going to happen in China or anywhere else in the world.  I just supplement VXUS with VSS.

Do you supplement VTI with VB as well?

For those I use the mutual funds, but yea I have equivalents of VO & VB to overweight mid- and small-cap.  Whether or not that is a good strategy depends on whether my small brain has made the correct guess :)

lhamo

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Re: Total China Index ETF - any thoughts?
« Reply #30 on: July 12, 2018, 08:21:25 PM »
...creating "social credit" systems to intimidate citizens from associating with others who might harbor anti-government views.

That's Black Mirror level insanity.

Google Xinjiang and surveillance state....
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CoffeeR

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Re: Total China Index ETF - any thoughts?
« Reply #31 on: July 12, 2018, 09:45:11 PM »
Trump's trade war switch was flipped this morning at 12:01am.  Why anyone would invest in China right now is beyond me.
... because it is a contrarian move? Because China is down and the shares are on a (relative) sale? Because you want to be greedy when others a fearful?

When it come to China I am not greedy... I am not fearful... I just don't trust them. So I avoid them as much as I can knowing it may cost me some return. I fine with that.