The PowerShares Golden Dragon China Portfolio (NYSEArca:PGJ)
fell 4 percent on Tuesday, while a number of other prominent
China-focused ETFs were up as much as 3 percent-a sharp divergence
in performance related to the fact that PGY's Internet-company-rich
portfolio was hit hard by news that one of its constituents was
under investigation by U.S. securities regulators.
PGJ showed up in the No. 4 spot on IndexUniverse's
worst-performers list Tuesday because New Oriental Education (
), which has a 3.72 percent weight in PGJ, revealed Tuesday that
the Securities and Exchange Commission was investigating its
financial statements, according to a report published by Bloomberg
The company's ADRs shed more than a third of their value, and
the crisis in confidence quickly spread to other firms. It was the
latest corruption-related episode in a country said to suffer from
endemic corruption. To some, China's alleged corruption problem is
a reason to avoid the Chinese investments. To others, it's a cost
of doing business in a dynamic fast-growing country.
"The majority of the underlyings in that ETF are Internet
companies," said Reggie Browne, a market maker at Jersey City,
NJ-based Knight Securities. "FXI, in comparison, has a lot of banks
and financials," Browne added, referring to the iShares FTSE China
25 Index Fund (NYSEArca:FXI)
FXI, a $4.5 billion ETF that, unfairly, is frequently considered
a proxy for all investment in China, rose more than 3 percent,
while the SPDR S&P China ETF (NYSEArca:GXC) gained about
1.3 percent on the day.
The divergent returns stand as a reminder for investors that
understanding what's in a given fund is crucial, and that means
taking the time to distinguish indexes by more than their
Indeed, portfolio allocation is part of the issue. PGJ tracks
the Nasdaq Golden Dragon China Index, and allocates more than 43
percent of its portfolio to information technology companies,
according to PowerShares data. FXI, on the other hand, is dominated
by financials, as about a third of its underlying benchmark, the
FTSE China 25 Index, allocates to financial names.
The single company that triggered PGJ's downfall is nowhere to
be found in FXI's 26-securities portfolio, iShares data showed.
SSgA's GXC is also heavily tilted towards financials, as it tracks
the S&P China BMI Index. But New Oriental Education represents
only 0.3 percent of GXC's portfolio.
PowerShares, responding in an e-mail to a query from
IndexUniverse, noted PGJ holds New Oriental Holding, and also
stressed that PGJ's index has higher exposure to information
technology and consumer discretionary stocks than do FXI's and
GXC's. The latter two funds have much higher weightings in energy,
which traded higher, PowerShares said.
Interestingly, from a sector perspective, New Oriental Education
is considered a consumer discretionary company and is listed under
PGJ's and GXC's holdings as such.
'The real issue here, and the reason why PGJ is getting hit, is
because of how EDU is listed in the U.S.,' IndexUniverse's analyst
Dennis Hudachek, said. 'Many Chinese companies including the huge
Internet companies-like Baidu, Sina, Renren-list in the U.S. using
what's called a variable interest entity (VIE) to circumvent
Chinese laws on foreign direct investment.'
The investigation into EDU has raised concerns among investors
that similar action might follow for other Chinese companies listed
here, he said.
'Now, we don't even know exactly what the SEC is investigating,
but investors are selling first and asking questions later,'
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