Thursday, October 21, 2010

Pinpointing the Top China ETF Opportunities

We have been watching China and their ETF's pretty closely and this article is a good read as to why these are the top three ETF's.....

Think one ETF is as good as another as long as it’s in the same sector, country, or style as the alternatives? Perhaps that was the case ten years ago. In an effort to differentiate their exchange trade funds from others, however, ETF sponsors have really started to hyper focus their funds’ portfolios…. even within a particular grouping.

Take China based exchange traded funds for example. While the iShares FTSE/Xinhua Chain 25 Index Fund (FXI) may have the lead in hearts and minds of China-hungry investors, other funds of the same ilk may actually be the better choice, depending on your goal or strategy.

Just to put this idea into a stunning perspective, check out this performance chart of all the major China oriented funds for the year to date. While one could reasonably expect a mild amount of disparity when it comes to returns, you’d think they’d all basically offer the same result After all, they’re each investing in the same broad cross section of China’s stocks. Take a look though.

A 17% gain for the leader, and a 5% gain for the laggard, but the same underlying stocks? Wow. Even taking out the ‘Honk Kong’ leader, you’ve still got a 100% disparity from the next best performer and the weakest one. Of course, the different performances come as no real surprise once you look under the hood of these funds and really see what each is holding.

Just like many U.S. based ETFs, the idea of a “cross section of the country’s stocks” can have various meanings. For instance, the iShares FTSE/Xinhua China 25 Index’s (FXI) biggest two holdings are China Mobile Ltd., and then China Construction Bank Corporation. That sharply contrasts with the two biggest holdings of the iShares MSCI Hong Kong Fund (EWH), which are (in order) Sun Hung Kai Properties, Ltd., and Cheung Kong Holdings, Ltd.

To be clear, this isn’t a complaint. Quite the contrary actually, we should be celebrating these differences, so we can get the most out of a regional based opportunity rather than sit contently holding watered down carbon copies of ETFs. With that in mind, that’s where the real China opportunity comes to light.

They may still qualify as ‘new’, but several sector based China exchange traded funds are plenty liquid enough to trade now, and the performance separation within the group is easily wide enough to prompt a trader to pick and choose certain vehicles.

Take a look at the year to date performance chart of these sector-based ETFs, and take special notice a 20% gap between the leader and the laggard for the year so far.

Our favorites are the three leaders…. the Global X China Consumer ETF (CHIQ), the Claymore/AlphaShares China Small Cap ETF (HAO), and the Claymore/AlphaShares China Real Estate ETF (TAO). We either currently own those names in the ETF portfolio, or intend to own soon. Any of them offer a little more ‘umph’ than FXI does at this point.

The point here is simply to highlight the fact that there are obscure trends within the bigger China trend that are well worth tapping into. That’s one of the focal points of our ETF service, and the approach has been very rewarding.

Check out more of Andrew Hart post at  ETF


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