Although emerging markets have seen some shaky trading as of
late, developing nations still offer up a compelling investment
case. These nations generally have high growth rates, reasonable
amounts of debt, and can often be uncorrelated to broader markets,
a factor that could prove key given the woes in Europe.
In the emerging market space, China continues to dominate the
discussion by a wide margin thanks to the massive size of the
economy and the country's exporting and resource consuming prowess.
However, concerns are beginning to build over the future economic
superpower as investors are starting to grow worried about a
property bubble, leadership changes, and broad inflationary
problems in the country.
Despite these concerns, China continues to plug along and its
equity markets remain resilient even with the pessimism. In fact,
broad Chinese markets are up on the year with the ultra-popular
adding nearly 15.5% in the first eight weeks of the year (Read
What Bubble? China ETFs Soaring To Start 2012
However, the product has retreated significantly in the past few
weeks as worries over Chinese demand have begun to build. As a
result, FXI is now up just 7.4% for the year, representing a huge
slump for the China ETF during March and early April (see more at
Fortunately, all of the China ETF space hasn't been as
negatively impacted. The small cap China ETF space, for example,
has managed to keep much of their gains from the first part of the
year as both of the China small cap ETFs are still up more than
11.5% on the year. Given this outperformance, it may be worth it
for investors to consider making an allocation to the space if they
want to stay in China but do it with better performing funds.
Furthermore, investors should note the differences between the
large cap focused FXI and the small cap ETFs targeting China. FXI
actually only consists of five sectors with more than half the
portfolio going to financials, 24% to energy, and 18% in telecom.
As a result of this breakdown, investors could also be better
served by looking at the small cap space as a way to achieve a more
diversified look at the China market (read
Forget FXI: Try These Three China ETFs Instead
However, investors should note that there are a few stark
differences between the two China small cap ETFs that are currently
on the market. These differences, in terms of expenses, volume, and
top holdings, could be the key factors for some investors in this
uncertain market. Thanks to this, we have highlighted the two
products in this space below along with a brief discussion of what
investors can expect in each fund in this intriguing market
Guggenheim China Small Cap ETF (
This China small cap fund looks to follow the AlphaShares China
Small Cap Index which looks at Chinese firms that have a maximum in
$1.5 billion float-adjusted market capitalization. The product does
have a decent component in firms based in Hong Kong, as these
securities account for roughly one-fourth of the total.
The overall basket of securities in the fund consists of nearly
220 companies with industrials (26%), basic materials (14%), and
consumer discretionary (14%), accounting for the top three spots.
Mid caps do account for 58% of the portfolio while large caps make
up another 4% of assets. This suggests that the product will not be
a pure play on small caps but will still have a tilt towards pint
Despite this and the expense ratio of 70 basis points, the ETF
has seen a great deal of interest from investors as it has amassed
over $170 million in AUM. It also doesn't hurt that the average
volume is over 110,000 shares a day and that the yield exceeds 2.8%
Five ETFs to Buy in 2012
iShares MSCI China Small Cap Index Fund (
This relatively new product also looks to give investors
exposure to the small cap China market, this time by tracking the
MSCI China Small Cap Index Fund. This benchmark looks to measure
the equity securities in the bottom 14% by market cap of the China
market. This is represented by H-Share and B-Share stocks but it
also includes Hong Kong listed stocks known as Red-Chips and
Overall, the fund contains just over 330 securities in its
portfolio, putting under 15% of its assets in the top ten holdings.
This ensures that company specific risk isn't much of a problem for
this fund. For sectors, consumer discretionary firms account for
19% of the assets, while industrials (18%), basic materials (15%),
and tech (13%) round out the top four (see
Three Great ETFs For Your IRA
Due to being the second product in the space, this ETF has
failed to attract a decent amount of interest from investors,
having amassed assets of just $16 million and volume of 5,300
shares a day. Nevertheless, the lower expense ratio of 65 basis
points and the solid dividend yield of 2.4% could make the product
intriguing to some investors.
Average Daily Trading Volume
Assets in top 10 holdings
Small Cap (or less) percentage
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