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Time to Buy This China ETF?

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China, the world’s second largest economy, faced difficult times in 2012, which continued through the first two quarters of 2013 as well. The slowdown in the Chinese economy came in the wake of a number of issues plaguing the developing nations. China has now become a flashpoint for the global economy where events could either promote global stability, or plunge other markets into a crisis.

Beyond global issues and taper talk, a domestic leadership transition and a lower GDP growth rate also impacted the economic health of the once economic all-star (read: China ETF Investing 101).

However, the good news is that the Chinese economy is gaining some strength now. This came on the back of improved manufacturing activity in the country, which is reported to be at a 16-month high (See: Is This China ETF About To Surge?).

The Purchasing Manager’s Index (PMI), as stated by the National Bureau of Statistics and China Federation of Logistics in Beijing, was at 51.0. A PMI reading above 50 indicates expanding activity, while a reading below 50 points to a contraction.

Meanwhile, growth levels are also picking up while cars sales are solid. This suggests that the consumer remains on track in the country, meaning that the nation has a well-rounded growth outlook.

Given these fundamentals, the country seems to be slowly rebounding. At this time some daring investors could take advantage of the situation.

Though the space is a bit risky and has been overlooked for some time, one should know that with more risk can come more gains. For now, we have selected a buy ranked ETF which could prove beneficial in such a situation. In fact, ETFs have often proved to be a safe haven compared to investing in individual stocks (See: Winning ETF Strategies for the Second Half of 2013).

About the Zacks ETF Rank

The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely, Low, Medium, or High.

The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks Rank reflects the expected return of an ETF relative to other products with a similar level of risk.

For investors seeking to apply this methodology to their portfolio in the small-cap segment of China, we have taken a closer look at the buy ranked HAO below:

Guggenheim China Small Cap ETF (HAO)

Launched in Jan 2008, HAO taps the small cap securities in the Chinese market that have a market capitalization of a maximum of $1.5 billion and a minimum of $200 million. HAO provides investors a broad exposure to the small cap securities of China and since its inception has amassed $183.8 million in assets.

The fund holds a basket of 251 securities of which 54% are mid caps and 39% are small caps. 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 12.48% of the asset base invested in the top 10 holdings. Among individual holdings, Youku Tudou takes the top spot, followed by Tsingtao Brewery and Sino Biopharmaceutical (read Try Small Cap ETFs to Gain from Chinese Domestic Demand).

Among sector holdings, Industrials (18.56%), Financials (14.84%), Consumer Discretionary (14.83%), Information Technology (12.35%) and Materials (12.31%) take the top 5 positions, while Consumer Staples, Healthcare, Utilities and Energy make a combined contribution of 24%.  

The product is a costlier choice in its space and charges investors 75bps in fees. In terms of performance, the product has given returns of 23.4% for the trailing one-year period.

However, on a year-to-date basis, the fund has negative returns of more than 0.4%, though the product has a decent yield of 1.34%. We believe that brighter days are ahead for this ETF, and that a focus on the small cap segment of this huge market can be a winning strategy for the months ahead. This is especially true given the weakness in other emerging markets, meaning that HAO might be worth a closer look at this time.

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