By Jared Cummans
Historically, many investors have maintained only minimal
exposure to emerging markets equities, citing the significant risk
factors as justification for the minimum weightings. But in the
current environment, many have pointed out that it is the developed
economies of the world that are ripe with risk. Health care reform,
drilling bans, and financial overhauls have been rolled out in the
U.S., while Europe braces for harsh austerity measures that figure
to impact several corners of the economy for years to come.
As U.S. investors have fought off their "home country bias,"
many have significantly increased the allocation to Chinese
equities in their portfolio, having been drawn in by the
mind-boggling growth rates and tremendous potential of what will
soon be the world's largest economy. Exposure to China once was a
binary attribute: either a portfolio had exposure, or it did not.
Recent innovation in the ETF space has significantly changed this
corner of the investing landscape; there are now more than 20 ETFs
offering exposure to China, each with its own unique risk/return
Below, we profile the most popular ETFs offering exposure to
China. First, however, we take a quick look at some of the factors
that impact Chinese markets.
China Price Movers
There are a number of factors that contribute to movements in
the Chinese markets, some of which can be extremely unpredictable.
Drivers of Chinese markets include:
: China's currency policy has sparked fierce debate globally for
several years now, with many analysts accusing the government of
manipulating the yuan to boost China's export market. Although
Beijing has indicated that it will allow the yuan to fluctuate,
the exact ramifications of that decision remain to be seen.
: Closely related to the exchange rate, export activity is a
major driver of economic growth in China. For decades, China has
been a net exporter of relatively cheap goods to advanced
economies, including the U.S. and Europe. Historically, low labor
costs have allowed Chinese companies to compete effectively with
foreign products on the basis of price. Overseas demand regulates
China's exporting process, and when the rest of the world is
under financial scrutiny, China may feel the pinch.
: Although many Chinese cities are among the most modern in the
world, parts of rural China remain far behind the civilized world
in terms of infrastructure. Growth of China's economy depends on
part on continued development and modernization of these remote
: As a communist nation, China's government has the ability to
exert a significant amount of control over the private sector.
Although China has become increasingly open to foreign investment
in recent years, a number of sectors (such as financials) remain
under heavy government influence.
Geopolitical tensions in Asia will inevitably impact China. Along
with a long-standing feud with Taiwan, China is known as the
chief supporter of the rogue regime in North Korea which has
attracted attention as of late. Should Chinese growth rates slow
down, it could create political instability and unrest which
would ward off potential investors who are wary about allocating
their money to an uncertain market.
China is now the world's largest user of energy, and accounts for
a significant portion of global commodity demand. Because the
country imports significant amounts of raw materials, Chinese
industries are vulnerable to swings in commodity prices.
Large Cap China ETFs
Many of the largest ETFs offering exposure to Chinese equities are
tilted heavily towards giant and large cap stocks. These ETFs
iShares FTSE China (HK Listed) Index Fund (
This fund focuses primarily on giant market capitalization firms;
FCHI focuses the majority of its assets in the financials (47%),
energy (19%), and telecom (15%) sectors.
PowerShares Golden Dragon Halter USX China Portfolio (
This fund tracks the Halter USX China Index, a benchmark that is
comprised of the U.S.-listed securities of companies that derive
a majority of their revenue from the People's Republic of China.
As such, PGJ offers a unique option for China exposure.
SPDR S&P China ETF (
State Street's GXC invests in a broad range of market sectors,
allowing investors to have their hands in all corners of the
China equity market. GXC tracks the S&P China BMI Index, a
benchmark that measures the investable universe of publicly
traded companies domiciled in China that are legally available to
iShares FTSE/Xinhua China 25 Index Fund (
FXI is the biggest China ETF, but it certainly isn't the most
diverse. This ETF has about 25 holdings, and big weightings in
the financials and energy sectors. FXI is light on consumer
exposure, a potential drawback for investors looking to tap into
China's growing middle class.
Small Cap/All Cap ETFs
Small cap ETFs covering the U.S. market have long been popular
with investors, but opportunities to access smaller companies
listed in foreign markets have historically been limited. That is
beginning to change, however, as investors focus more on the
international component of portfolios and begin seeking out
alternatives to large cap-heavy funds.
Claymore/AlphaShares China Small Cap Index ETF (
HAO tracks the AlphaShares China Small Cap Index, a benchmark
that includes companies with a float-adjusted market cap between
$200 million and $1.5 billion. This fund gives investors more
diverse exposure to the Chinese economy, making material
allocating to all of the various market sectors. One other
interesting note: this ETF gives no single holding a weight over
2.2%, adding to its already strong diversity.
Claymore/AlphaShares China All-Cap ETF (
For investors looking to cover the whole spectrum of Chinese
stocks, YAO is an interesting option. This fund gives a big
weighting to energy and financials, but maintains a relatively
balanced allocation overall.
Again, sector-specific funds covering various corners of the
U.S. market are nothing new. But until recently there weren't many
options for investors looking to bet on a specific part of the
Chinese equity market. Now, there are a handful of ETFs offering
exposure to everything from energy to technology to
Global X China Technology ETF (
This technology centered ETF spreads its assets out over giant,
large, and medium cap companies. With a heavy focus on the
telecom sector, CHIB's top holding comes from search engine giant
Baidu Inc. (
Global X China Energy ETF (
CHIE tracks the S-BOX China Energy Index, a benchmark that
includes significant allocations to alternative energy firms in
addition to traditional oil and gas and coal-related stocks.
China Materials ETF (
CHIM allocates nearly all of its assets to the industrial
materials sector, and spreads its assets across large, medium,
and small cap firms.
Claymore China Technology ETF (
Claymore's CQQQ overlaps considerably with CHIB, as both offer
exposure to Chinese tech companies. CQQQ has about 30 individual
holdings, the largest of which are Tencent Holdings and search
engine giant Baidu. CQQQ's biggest allocations are to the telecom
(52%) and hardware (15%) sectors.
China Industrials ETF (
This ETF holds 32 securities that focus on the industrial
materials and business services sectors. CHII offers exposure to
a corner of the Chinese market that has exploded over the last
two decades, accounting for a big portion of the country's
China Consumer ETF (
CHIQ offers exposure to a corner of the market that most
cap-weighted funds ignore. CHIQ's largest holdings include China
Yuran Food Group (5.6%), major sports brand Li Ning (5.3%), and
Air China Limited (5.1%). CHIQ may be attractive for investors
who expect that China's middle class will continue to expand and
accumulate wealth, thereby increasing their appetite for consumer
goods and services.
INDXX China Infrastructure Index Fund (
This ETF offers targeted exposure to another unique corner of the
Chinese market, focusing on infrastructure companies. Among the
largest holdings of CHXX are China Railway Construction
Corporation (5.1%), Jiangxi Copper Company (5%), and China
Telecom Corporation (
) (5%), highlighting the extent to which this ETF is diversified
across various corners of the infrastructure industry.
Global X China Financials ETF (
CHIX contains about 25 holdings, all of which are focused in the
financials sector. Not surprisingly, CHIX invests in some of the
world's largest financial institutions, and is tilted towards
giant and large market capitalization stocks.
For the most risk tolerant of investors, there are a number of
inverse and leveraged ETFs that provide an opportunity to amplify
exposure to Chinese equity markets:
Short FTSE/Xinhua China (
This ProShares fund seeks to deliver daily returns equal to the
inverse of the FTSE/Xinhua China 25 Index.
Direxion Daily China Bear 3x Shares (
This fund seeks daily returns equal to -300% of the change in the
Bank of New York Mellon China Select ADR Index, a benchmark made
up of companies that have a primary equity listing on a stock
exchange in China.
Direxion Daily China Bull 3x Shares (
Opposite of the previous ETF, this fund offers 3x daily leverage
to the Bank of New York Mellon China Select ADR Index.
ProShares Ultra FTSE/Xinhua China 25 (
This 2x leveraged ETF is also linked to the FTSE/Xinhua China 25
Index, seeking to deliver 200% of that benchmark's daily
ProShares Ultrashort FTSE/Xinhua China (
This ETF is XPP's bear counterpart, seeking daily results of
-200% of the same benchmark.
Real Estate ETFs
With the worlds largest (and increasingly urban) population,
China's real estate markets are often volatile, but have a history
of delivering impressive gains. There is one ETF that clears a path
for investors to play China's dynamic real estate sector:
Claymore/Alphashares China Real Estate ETF (
TAO seeks to replicate the performance of the AlphaShares China
Real Estate Index, a benchmark that is designed to measure the
performance of the investable universe of publicly-traded
companies and REITs deriving a majority of their revenues from
real estate development, management and/or ownership of property
in China, Hong Kong, and Macau.
Given recent events, interest in China's currency has surged
among investors outside of the country; many believe that the yuan
could rise as much as 35% against the dollar if a longstanding peg
was completely abolished. There are two ETFs offering exposure to
Market Vectors-Chinese Renminbi/USD ETN (
WisdomTree Dreyfus Chinese Yuan Fund (
No positions at time of writing.
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