ETF Database (ETFdb): Global X is has just launched a line of sector-specific China ETFs, including funds focusing on technology (CHIB), energy (CHIE), financials (CHIX), consumer products (CHIQ), and industrials (CHII). What do these ETFs offer to investors?
Bruno del Ama (BD): These ETFs offer focused access to specific sectors of the Chinese economy, similar to what sector SPDRs offer in the U.S. As a point of comparison, there are 400-plus ETFs in the U.S. that offer exposure to various segments of the U.S. equity market. By contrast, the options in China are very limited. And of the existing ETFs that offer China exposure, almost all of them focus primarily on mega-capcompanies.
Boom Continues
But this home country bias is changing, and investors are beginning to seek out more international exposure. I think part of the reason why investors have been slow to embrace international equities is simply because it wasn’t easy to do. A good example is China. A lot of people who are investing in China today were not investing in China before some of the ETFs currently offered were out there. It is now a lot easier and less expensive to gain international exposure – ETFs are facilitating that and it is clear that the demand exists.
ETFdb: Let’s talk about exposure to the consumer sector in China. It goes unnoticed that FXI, by far the biggest China ETF, has almost no exposure to the consumer industry. Why is exposure to this part of the Chinese economy important, and how mightCHIQ fit into a portfolio?
BD: Historically, the industrial sector has driven growth in China. But looking ahead, many investors expect the developing consumer base in China to play a major role in the country’s growth. Consumer spending in China accounts for only about 35% of GDP, half the level of the U.S., so there is significant room for growth. There are a number of factors that are likely to trigger this growth, such as income and credit growth, demographic trends, and even incentives from the Chinese government.
Incomes are growing along with the economy. For example, millions of Chinese are moving into the $5,000 to $6,000 salary base, which is when consumers typically start moving from pure staple type consumption to actually starting to consume discretionary items. The development of the credit industry, including credit cards, is also likely to have a positive impact on consumption – any growth in credit should have a positive impact on spending.
Another key factor is demographics. Historically, the working population in China had been growing much more rapidly than the population as a whole. This growth facilitates the development of a big production machine, but this segment of the population was in the saving part of their life cycle. For the last 10-20 years, as these workers have been getting older, they have started migrating from saving to spending in their life cycles. This inevitable process will trigger significant growth in consumption within China. As far reached as it sounds, China will probably end up consuming more than it actually produces at some point in the future.
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Bruno del Ama is the CEO of Global X Management, the New York-based ETF issuer behind several of the innovative exchange-traded products to hit the market in recent months, including the first ETFs offering investors exposure to Colombia and the Nordic region and the first sector-specific China ETFs. He recently took time out of his busy schedule to talk about China, ETF innovation, and more with ETF Database.
