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China – the world’s second largest economy – faced difficult times in 2012 thanks to a variety of issues that developing nations were facing. European woes and a slow recovery in the U.S. hampered the export businesses of the region to a great extent, and left many gloomy on the nation's prospects going forward.
Beyond global issues, a domestic leadership transition and a lower GDP growth rate also impacted the economic health of the once economic all-star (China ETF Investing 101).
This situation caused many to look to other emerging markets for exposure in the past year. Many investors shifted their assets from China ETFs to other country ETFs which exhibited resilience to the uncertain economic environment.
This has continued in 2013 as many Chinese ETFs have floundered to start the year. Worries continue to build regarding a strong dollar impacting repatriated assets, while concerns over a property bubble are also coming to the forefront (Three China ETFs Still Going Strong).
Still, even with these issues, many are growing optimistic on China in the near term. Growth is expected to be in the neighborhood of 8% for the year, an improvement over 2012’s rates.
Meanwhile, with the swoon in stock prices in the country, many Chinese securities are becoming great values. P/E ratios on at least a handful of the funds are in the single digit range, pretty remarkable considering the long term prospects of the nation.
So, it could be time to take a closer look at any of the many China ETFs currently trading on the market, many of which are entering oversold territory. Below, we have highlighted four of the more popular options in the segment, any of which could be an interesting way to target the Chinese economy as we head into earnings season:
FTSE China 25 Index Fund (FXI)
FXI is the most popular fund in the family of ETFs providing exposure to the Chinese equity market. FXI is both rich in asset base and volume. The fund manages an asset base of $7.3 billion and trades at a volume level of more than 16 million shares a day.
The fund’s exposure to Chinese stocks is limited to a small basket of 26 stocks. It does not therefore have a broad exposure to the country’s securities. Also, the fund is biased towards the top ten holdings as more than 60% of the asset base goes towards them.
Among individual holdings, China Mobile, China Construction Bank and Industrial and Commercial Bank of China take the top three positions. For investment in the fund, FXI charges a fee of 74 basis points from investors (Three Financial ETFs That Avoid Big Bank Stocks).
The performance of the fund has been disappointing in 2011 as it delivered a negative return of 17.7%. However, the fund has done much better following the 2011 debacle, and has delivered a return of 0.7% over a period of one year.
Guggenheim China Small Cap ETF (HAO)
HAO taps the small cap securities in the Chinese market that have market capitalization of a maximum $1.5 billion and a minimum of $200 million. HAO provides investors a broad exposure to the small cap securities of China.
The fund holds a basket of 226 securities of which 54% are mid cap and 32% are small cap. This indicates that the fund does not offer a pure play in small cap securities and has exposure to some larger firms.
HAO has a diversified offering with just 15.6% of the asset base invested in the top ten holdings. Among individual holdings, Great Wall Motors takes the top spot, followed by Longfor Properties and Sino Ocean Land Holdings (read Try Small Cap ETFs to Gain from Chinese Domestic Demand).
Among sector holdings, the fund assigns double-digit allocation to industrials, financials, consumer discretionary and materials. Among others, the fund does not invest more than 9.58%. The fund delivered a return of 7.3% over a period of one year.
SPDR S&P China ETF (GXC)
GXC also provides a broad exposure to Chinese securities through a basket of 217 stocks. In this basket, the fund invests an asset base of $969.8 million. For this the fund charges an expense ratio of 59 basis points.
The ETF is moderately diversified with 45.6% of the asset base going towards them. Among individual holdings, China Construction Bank gets the top position with a share of 7.58% while the second and third positions have been assigned to China Mobile and Industrial and Commercial Bank of China which have 7.47% and 6.15%, respectively.
Among sector holdings, the fund assigns double-digit allocation to financials, energy and information technology. Among others, the fund does not invest more than 9.69%. The fund delivered a return of 1.9% over a period of one year.
MSCI China Index Fund (MCHI)
For exposure in large cap securities in China, investors can look to invest in MSCI China Index Fund Profile. The fund invests 79% in large caps while the rest goes towards medium and small caps (Comprehensive Guide to Total Market ETFs).
The fund is home to 137 large cap Chinese stocks in which it invests an asset base of $802.9 million. It also offers liquidity to investors as more than 100,000 shares trade in an average day.
The ETF is biased towards the top 10 holdings as more than 50% of its assets are invested in these stocks. Among individual holdings, China Mobile Ltd is in the top spot with 10.03% of assets invested.
This is closely followed by China Construction Bank and Industrial & Commercial Bank of China. The expense ratio comes in at 58 basis points annually.
Among sector holdings, financials takes the top position with an asset investment of 38.6% while energy and telecommunication take the other two spots with respective shares of 17.62% and 12.44% of the fund. The fund delivered a return of 3.6% over a period of one year.
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