When it comes to emerging markets exchange-traded funds (ETFs), investors usually have two choices. First, they can consider diversified exposure with ETFs tracking stocks in a wide array of developing economies. Second, more tactical investors can consider single-country ETFs. A smaller amount of emerging markets ETFs focus on just a handful of countries. Those are usually regional ETFs. The First Trust Chindia ETF (FNI) offers investors a focused play on two of the biggest, and currently two of the hottest, emerging markets – China and India. Obviously, with FNI, investors do not have to choose between China and India.

The combination of China and India in one ETF wrapper is proving potent this year. China and India, two of Asia's three largest economies, combine for 35 percent of the MSCI Emerging Markets Index. That dynamic duo is a big reason why the emerging markets benchmark is up 19.1 percent year to date. However, that gain trails the 29.3 percent returned by FNI. In fact, FNI has been outpacing the largest China and India ETFs since the start of the year. (See also: The World's Top 10 Economies.)

FNI, which turned 10 years old earlier this month, follows the ISE ChIndia Index. That index is a highly focused benchmark with less than 50 holdings. FNI's index selects "the top 25 stocks from each country by liquidity score. If less than 25 stocks are available for a country, then continue selecting stocks from the other country until a maximum of 50 stocks are selected," according to First Trust.

Although FNI holds stocks from just two countries compared with the nearly 20 countries found in the MSCI Emerging Markets Index, FNI's correlation to the emerging markets benchmark is relatively high at 0.86. Perhaps due in part to the fact that India is historically one of the more volatile equity markets in the developing world, FNI's three-year standard deviation is 235 basis points above that of the MSCI Emerging Markets Index. (See also: An Introduction to the Indian Stock Market.)

Explaining FNI's ascent this year is not all that difficult. A quick glance at the ETF's sector weights solves the mystery. FNI allocates about 69 percent of its combined weight to technology and consumer discretionary stocks. Chinese stocks from those sectors are among the world's best-performing equities this year. FNI's weight to those two high-flying sectors is nearly double the 35 percent that the MSCI Emerging Markets Index devotes to those groups. Over the past five years, FNI is up nearly 10 percent compared with a 1.5 percent gain for the emerging markets benchmark. (See also: 5 Things to Know About the Chinese Economy.)

 

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