Emerging Chinese Aluminum and Copper Titans

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Prior to joining Global X Funds, Alex Ashby lived and traveled extensively throughout Asia.  He currently manages a group of six ETFs covering the consumer, energy, financial, industrial, material, and technology sectors of the Chinese economy.  The Global X China Materials ETF (NYSEMKT: CHIM) provides investors with exposure to materials companies in China and is designed to be a transparent, cost-efficient way to get access to the growing demand for energy within the country.

Nick Slepko:  You’ve said that your China Consumer ETF has been the most popular in part because it is a story that people can easily grasp and understand.  What’s the second easiest one for people to get?

Alex Ashby:  Probably the materials.  Everyone knows that China is a huge consumer of commodities, and that it has a number of resources it can tap domestically and in nearby regions like Central Asia.  So, when you connect these two ideas, the China Materials ETF becomes interesting because it gives exposure to these domestic companies that are helping to fuel the growth in China. 

Slepko:  Global X knows a lot about China as well as the world of copper since it has been following the market with its global Copper Miners ETF (NYSEMKT: COPX).  Do you think Jiangxi Copper (NASDAQOTH:JIXAY) [which is one of the major holdings in both CHIM and COPX] will be satisfied with the domestic market, or is it one of those that will break out and be a global champion?

Ashby:  Copper is an area where China is a huge consumer, and the copper market has moved a lot on news out of China, in addition to housing market activity in North America and the ongoing deterioration of the economy in Europe. Jiangxi’s primary market is obviously China, but it also exports to markets like Taiwan and Australia.  While Chinese energy companies have been more aggressive with their international expansion plans, materials companies like Jiangxi could follow suit if global growth picks up again and copper prices begin to recover.

Slepko:  What about Aluminum Corporation of China (NYSE: ACH)?  Global X recently closed up its aluminum ETF, and I’m curious if that is an area that is going to grow, or did you end your ETF because aluminum isn’t successful?

Ashby:  We still think aluminum is important – it is one of the most versatile metals and is used in everything from autos to packaging to construction.  However, copper has become a bellwether for the global economy, and people seem to view it as a reflection of economic growth in a way that has increased its demand from an investment standpoint.  I think aluminum is a case where the aluminum market itself has had some oversupply issues for a while which have persisted longer than was anticipated and I think that impacted the ETF when we brought it to market.  Aluminum Corp of China is the country’s largest aluminum producer, so like Jiangxi it has the advantage of being domiciled within the largest aluminum consumption market.  However, the entire aluminum industry has been hit by excess production capacity, so the success of aluminum producers has become more about managing costs in the current environment as the supply/demand balance comes back into line.  If ACH can manage this period successfully it could position itself well for growth when market fundamentals improve.

Slepko:  Why have you chosen to pay the extra expense of holding the ordinary Hong Kong-listed shares of Shanghai Petrochemical rather than its ADR (NYSE: SHI)?

Ashby:  In the case of Shanghai Petrochemical, the ADR is simply not very liquid – this lack of liquidity would probably erode most of the cost savings of holding the ADR because it would be more difficult and costly for the fund to buy and sell the security. For ETFs, investors often focus on the liquidity of the ETF itself.  However, because of the creation/redemption process and some other characteristics unique to ETFs, the liquidity of the underlying securities is arguably more important.  Holding liquid securities will reduce the trading costs for the fund (and therefore reduces costs for the investors in the fund) and will also help market makers create tighter spreads and facilitate trading in the ETF itself.  Having liquid components also reduces any sort of price impact that the fund might have on individual securities, which is also an important element for ETF investors.  In the case of Shanghai Petrochemical, if the liquidity of the ADR were to improve significantly and got to a point where it would be more cost-effective to hold the ADR then you could eventually see this reflected in the fund.

Nick Slepko (hukgon) has no position in any company mentioned here at the time of publication. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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