On Monday, June 24, global index provider FTSE Russell will add the China A shares of approximately 1,090 Chinese mainland stocks to the FTSE Global Equity Index Series. Notably, more than one third of these stocks (376) are small cap, with the rest qualifying as mid- and large-cap.
We believe that when investing internationally, particularly in large emerging markets like China, exposure across the cap scale is the most effective way to ensure true market representation while providing optimal portfolio diversification. According to our experts, ignoring international small caps risks winding up with an incomplete global market picture.
Alec Young, managing director, global market research:
“One of the primary reasons investors allocate globally is to increase overall portfolio diversification as foreign stocks often zig when US shares zag. Yet many investors focus only on large caps when venturing overseas. Overlooking international small caps risks sacrificing valuable diversification potential as they have historically sported lower correlations to US stocks than foreign large caps. China is a case in point. Chinese small cap stocks have historically had lower correlations with US equities than their large cap counterparts. Over the past five years, the FTSE China Small Cap Index sports only a 44% monthly correlation to the US Russell 1000 Index vs. an 61% correlation for the FTSE China Index.”
Catherine Yoshimoto, director, product management:
“While small cap China A Shares have seen periods of both underperformance and outperformance relative to the broader China A Shares market, from a true market representation standpoint, including them in our FTSE GEIS and derived indexes offers benchmarks that are accurate reflections of what investing in the Chinese equity market looks like today and enable investors to have a truly diversified China equity exposure.”
FTSE China A Indexes – 10 Year Performance Comparison
Source: FTSE Russell as of May 8, 2019. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
See more information about the FTSE Global Equity Index Series.
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