The Best ETFs to Invest In China
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Chinese assets have done quite badly in the last year due to several reasons. Chief among them, fears about the Eurozone crisis have affected investors' risk appetite and many of them decided to focus on safer, well-known assets. And accounting scandals in Chinese companies don't help at all with the trust issue.
The economic cycle in China is extremely difficult to predict because it's a very particular economic regime in which the government and regulators have a very strong influence. Some analysts also question the veracity of the country's official economic statistics.
The People's Bank of China has recently changed its policies from monetary tightening to combat inflation to expansionary policies seeking to promote growth. This change has been well received by investors that fear a hard-landing scenario in China due to the effects of both government policies and the international context.
The economic situation in this gigantic country is going to remain uncertain over the next several months, but the opportunities for long-term investors are extraordinary. Economic growth is going to be much higher than in developed nations for a few decades at least, and new businesses and opportunities for profits will be abundant. China faces important long-term challenges, but at the same time presents unique opportunities for investors.
The most popular ETF to invest in China is the iShares FTSE/Xinhua China 25 Index (NYSEMKT: FXI), which is very liquid and was one of the first instruments available to invest in that country. Unfortunately this ETF is not the best alternative when considering its holdings: it has only 25 positions and financials represent more than 50% of the portfolio -- too much concentration, especially in the financial sector, which is not very transparent.
Investors looking for exposure to large-cap companies in China can find a better instrument in SPDR S&P China ETF SPDR S&P China ETF (NYSEMKT: GXC), a fund that holds 172 different names and has a higher level of diversification. Financials are still the biggest sector with a 29% weight, but other sectors are also important: for example Energy 12.3%, Industrials 11.9% and Technology 11.6%
But you don't need to stick with the biggest companies. There are options with better long-term risk/reward prospects. There is less government intervention and more explosive growth opportunities among small and mid-sized companies. Also, there are some sector-specific ETFs that provide exposure to very attractive investment ideas.
Guggenheim China Small Cap (NYSEMKT: HAO) is one interesting alternative to consider. The ETF invests in mid- and small-cap Chinese companies, it holds more than 200 securities and right now the biggest position is no bigger than 1.45% of the portfolio, so it provides adequate diversification. Industrials (25.5%), consumer (19.3%) and basic materials (15%) are heavily represented, but so is the unstable real estate sector with 12% of the portfolio.
The rise of the middle class is going to be a booming phenomenon in China for a long term, and there is one ETF that provides an interesting vehicle to capitalize some of the new business opportunities that will emerge. Global X China Consumer (NYSEMKT: CHIQ) has a portfolio of 40 stocks in the consumer sector of the Chinese economy, offering unique exposure to sectors like retail, food and automobiles, which have tremendous growth prospects in the long term.
Claymore/AlphaShares China Technology (NYSEMKT: CQQQ) provides exposure to 30 Chinese tech companies. China is a high-growth country and technology is a high-growth sector, so let's agree you can find some interesting growth opportunities here. But risk is also very elevated -- this ETF is highly exposed in some Chinese Internet companies that can be very volatile and uncertain.
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