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Do you need more BRIC in your wall?

Burton Malkiel, the Princeton University economist and long-time index investor, has been urging investors for years to increase their exposure to emerging markets, and more specifically, Chinese equities. In the past, he has suggested the following model portfolio for an individual in their forties:


Is China underrepresented in investors’ portfolios?

As Malkiel has highlighted, it is very likely that China is significantly underrepresented in any indexed portfolio for the following reasons:

  • Only Chinese shares that are publicly available are included in global and emerging markets “float-adjusted” indexes.
  • These indexes generally exclude “A” shares that trade on the Shanghai and Shenzhen stock exchanges, as well as a large amount of government-owned shares that do not trade freely.
  • China represents 28.3% of the emerging markets capitalization but holds a weighting of only 17.3% in the Vanguard Emerging Markets ETF (VWO). [see Chart 1.1]

How can I increase my exposure to Chinese equities?

In reality, most investors would not be comfortable with Malkiel’s high emerging markets allocation in his suggested model portfolio – however, whatever your preferred emerging markets allocation, your Chinese equity exposure could be increased by combining the following two ETFs:

  • Allocate 80% of your emerging markets allocation to the Vanguard Emerging Markets ETF (VWO).
  • Allocate the remaining 20% of your emerging markets allocation to the SPDR S&P China ETF (GXC).

This small variation will increase your overall emerging markets BRIC (Brazil, Russia, India and China) exposure by approximately 10%, while better reflecting China’s true emerging markets capitalization.  A typical equal-weight balanced index portfolio allocation is shown below:

By: Justin Bender | 0 comments