China ETFs

The economic crisis around world has put China under the spotlight. The world’s third largest economy, who also holds nearly $2 trillion in foreign exchange reserve, has started to use its nearly $600 stimulus package to revive its economy, building highways and railroads, investing in educations, and improving social welfare. While banks in the U.S. are struggling to clean up their books, banks in China have made $156 billion new loans in February after lending $237 billion in January ( to support the 8% growth target. And the government’s action has produced some encouraging results: Retail sales have stabilized in the first two months and power output actually increased 5% in February.

And Chinese stocks are the best performers so far in 2009. The Shanghai Composite Index has gained 18% this year after falling more than 65% in 2008, while the S&P 500 index, coming off fresh 12-year low last week, lost nearly 9% during the same period. Some economists predicted that China will be the first country to come out of this recession. If China indeed takes this economic downturn as an opportunity to strengthen its ability to compete globally for the long-term (NYT), investors can expect to profit from China’s recovery and expansion.

For investors who want to tap into the growth of the Chinese economy, there are a few options in the exchange-traded funds (ETFs) arena which provide the much needed diversification (see Investing in China with Cautions). In addition to two popular that mainly invest Chinese companies, iShares FTSE/Xinhua China 25 Index (FXI) and PowerShares Golden Dragon Halter USX China (PGJ), which I have discussed before along with MCHFX, you may also want to check out:

  • Claymore/AlphaShares China Real Estate (TAO)
  • Claymore/AlphaShares China Small Cap (HAO)
  • iShares FTSE China (HK Listed) Index (FCHI)
  • SPDR S&P China (GXC)

Claymore/AlphaShares China Real Estate (TAO)

TAO tracks the AlphaShares China Real Estate Index, which measures performances of public traded companies in real estate development and property management in mainland China and Hong Kong and Macau. The fund usually invests at least 90% of its assets in common stocks traded on both Chinese stock exchanges (China and Hong Kong) and American Depositary Shares (ADSs).

The AlphaShares index uses a modified float-adjusted market capitalization weighting methodology to weight individual stocks. To be included in the index, a company must have a minimum market capitalization of $500 million. The index currently has 41 components, with weighting heavily tilted toward Hong Kong (88.92%). The only ADS component of TAO is E-House Holding (EJ). Rebalancing of the index occurs once every year.

Since the inception on December 17, 2007, TAO has lost nearly 60%, at the same level as iShares Dow Jones US Real Estate (IYR). YTD, TAO has a return of -11%, outperforming both the S&P and IYR. TAO has a maximum expense ratio of 0.65%.

Claymore/AlphaShares China Small Cap (HAO)

HAO invests in primarily small, publicly traded companies based in China (only mainland China based companies will be considered for inclusion) with a maximum market cap of $1.5 billion. The fund’s underlying index, the AlphaShares China Small Cap Index, is a modified float-adjusted market capitalization weighting index. It currently consists of 148 securities, with ADRs such as Ctrip International (CTRP), (NTES), Mindray Medical International (MR), (SOHO), and New Oriental Education (EDU) among the top 10 holdings. The index is rebalanced annually.

Since the HAO was launched on January 30, 2008, the fund has lost nearly 50% of its value, underperforming both the S&P 500 and the iShares Russell 2000 Index (IWM) during the same period.

HAO charges a fee of 0.70%.

iShares FTSE China (HK Listed) Index (FCHI)

Unlike other exchange-traded funds discussed here, FCHI invests exclusively in Chinese companies listed on the Hong Kong Stock Exchange. Its top 10 holdings include red-chip stocks (the equivalents of blue-chip stocks in U.S.) China Mobile, China Life Insurance, ICBC, Bank of China, China Construction Bank, PetroChina, Ping An Insurance, CNOOC, China Petroleum & Chemical, and China Unicom.

The underlying index of FCHI is the FTSE China (HK Listed) Index, which consists of 87 largest Chinese companies, many of which are also traded on U.S. stock exchanges. Securities in the index are weighted based on their market capitalization.

Since the fund’s inception on June 24, 2008, FCHI’s price has dropped nearly 38%, slightly better than iShares FTSE/Xinhua China 25 Index (FXI), which also consists of stocks listed on HKSE. Actually, all stocks in FXI are included in FCHI. FCHI has an ER of 0.74%.

SPDR S&P China (GXC)

GXC tracks the S&P China BMI Index, which is a market capitalization weighted index. Stocks included in the index are listed on mainland China stock exchange, Hong Kong Stock Exchange, or NYSE/NASDAQ (ADRs). The index consists of 342 securities as of December 31, 2008, but the fund only includes 131 stocks with China Mobile, China Life Insurance, China Construction Bank, PetroChina and ICBC being the top 5.

Since the fund was launched on March 19, 2007, its performance is almost identical to that of FXI, both are down a little over 20%. GXC has a gross expense ratio of 0.59%.

*Stock charts from INO Market Club

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