Buying Chinese Stocks with the Best China ETF

Over a month ago I bought shares of Alibaba. It was my first direct position into Chinese markets – via a variable interest entity. And even with the recent downturn in Chinese stocks, my investment thesis hasn’t changed. If anything, I’m tempted to buy even more. 

There are some legendary investors that have bought Chinese stocks, which you’ll see here soon. But my Alibaba position makes up close to 10% of my total portfolio. 

Chinese Stocks via the Best China ETF 

Instead, I’m now considering buying into a basket of Chinese stocks with one of the best China ETFs. After many hours of research, I’ve decided one of the best funds is iShares MSCI China ETF (Nasdaq: MCHI). It’s one of the largest Chinese ETFs with more than $6 billion in assets under management. It’s been around since 2011 and also has one of the lowest expense ratios at 0.59%. For an international fund, that’s very competitive. Unfortunately, Vanguard doesn’t really have a comparable fund. 

MCHI pays a small dividend. It bounces around a bit but it’s a plus nonetheless. The fund has about 600 positions and its top 10 holdings make up about 44% of the fund. It’s market cap weighted. Both Alibaba and Tencent are just over 10%. So, I’d be gaining more exposure to Alibaba but I’m more comfortable with this diversified approach. And Tencent is another company I’ve also considered buying into directly. 

In the off chance there are more Chinese stock delistings, the fund is better positioned to maintain its holdings. That’s partially because of its size but also, this China ETF invests directly into the Hong Kong listings. So, that might help minimize some slight exchange risk. 

To start, let’s look at big investors that are buying and selling Chinese stocks. A move by Charlie Munger initially caught my attention. That was a few months back but there’s been some other noteworthy comments since, from some names you’ll likely recognize… 

Who’s Buying and Selling Chinese Stocks? 

Buying Selling 
Charlie Munger Cathie Wood 
Mohnish Pabrai Jim Cramer 

Charlie Munger bought into Alibaba earlier this year via the Daily Journal (Nasdaq: DJCO), where he’s a chairman and portfolio manager. According to the company’s past 13F filing, Alibaba made up about 17% of its equity portfolio… 

That’s a large chunk of the Daily Journal, but it’s small in comparison to Berkshire Hathaway. Nonetheless, this is a significant move from Charlie and a strong vote of confidence. He has an outstanding track record of success over many decades. He clearly thought – and likely still thinks – the potential reward outweighs the geopolitical risk. 

Mohnish Pabrai is lesser known but is still a proven value investor who’s taken a significant stake in Alibaba. I’ve followed him a bit over the years and he also has close ties to Charlie Munger. Mohnish has invested close to 15% of Pabrai Fund’s equity portfolio in Alibaba. He’s also been a bit more vocal on why he’s willing to buy certain Chinese stocks. 

In an interview when asked about Chinese regulatory issues, he said he thinks Alibaba is a crown jewel for China, along with Tencent. These companies can have a global footprint for the country. And he doesn’t think China will kill their golden goose. Regulators have recently extracted their pound of flesh and he doesn’t expect much more than what we’ve already seen. 

Now, on the other side of the aisle, Cathie Wood has been dumping Chinese stocks. But I’m very hesitant to follow her investment strategies. She’s gained popularity over the past few years with her big investment bets with ARK Funds. They’ve paid off well for investors over the past few years. Although, I’ve been skeptical of her funds’ long-term potential. 

Ben Carlson on his blog A Wealth of Common Sense, has said… 

ARKK cannot outperform at this pace forever. There is bound to be a misstep or the style will simply fall out of favor for a period of time. Many of the investors chasing the hot dot will head for the exits at that point. 

Looking deeper online, I’ve found some more insight on Reddit. In Cathie Woods’ 20+ year performance history, she’s generally underperformed equivalent style peers on a year-by-year basis. She also tends to leave funds during or following a period of underperformance, then reboots in another fund. 

… so, I’ll continue to take her bold predictions and hype with a grain of salt. 

One more big name opposed to Chinese stocks is Jim Cramer. I’m not sure on his real portfolio holdings these days, but he’s recently said

I think it’s the height of irresponsibility to give Chinese stocks a second chance.

But when it comes to investment advice, Jim Cramer is lacking in that department. Of course, he gives plenty of advice… but his track record isn’t great either. There have been some studies that show following his stock picks would underperform. 

As a result, I’ll pass on Jim Cramer’s and Cathie Woods’ advice. I’m guessing more of their personal wealth is built on media performance and deal making that results from that. Instead, I put more weight into investors that have proven long-term investment track records like Charlie Munger and Mohnish Pabrai. 

Investing in Chinese Stocks 

With this in mind and as mentioned, my thesis for investing in Alibaba hasn’t changed. And I might soon gain a little more exposure to Alibaba with one of the top China ETFs, MCHI. Of course, there’s risk, but the risk-to-reward is looking pretty good. 

Please let me know if you have any comments or questions down below.

Invest mindfully, 

Brian Kehm 

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