3 China ETFs Worth Betting On

by Will Ashworth | May 8, 2014 11:35 am

3 China ETFs Worth Betting On

Three of the 10 worst ETF performances[1] in April were China ETFs. Chinese stocks in general haven’t had a good year, with the Hang Seng[2] down 5.6% through May 6 and the Shanghai SE Composite[3] down 4.8%.

Alibaba185 150x150 3 China ETFs Worth Betting OnChina still represents an enormous investment opportunity, and ignoring it completely would be unwise. But with the Chinese economy shifting to a business model dependent on domestic consumption[4] rather than investment and import/export it becomes a guessing game which China ETFs make sense for the average U.S. investor.

Nonetheless, here are three China ETFs I believe are worth betting on.

China ETF — iShares MSCI China ETF (MCHI)

iShares185 150x150 3 China ETFs Worth Betting OnAs China ETFs go, the iShares MSCI China ETF (MCHI[5]) is one of the biggest available in terms of net assets, with $845 million under management. Tracking the MSCI China Index, which iShares describes[6] as a “free-float-adjusted market capitalization-weighted index designed to measure the performance of equity securities in the top 85% of Chinese equity markets,” this is the most conservative of my three selections.

In the course of a year, it turns about 10% of its overall portfolio, providing a very stable, long-term investment. This China ETF is inexpensive for an emerging market ETF with a net expense ratio[7] of 0.61% (or $61 for every $10,000 invested), and its top 10 holdings represent 51% of its overall portfolio. Of the 142 holdings, 32% are financial stocks[8] with energy and technology rounding out the top three sectors  of Chinese stocks.

Although Morningstar gives this China ETF just two stars, I believe it’s a good fund to own because almost the entire ETF is composed of large- or giant-cap Chinese stocks. And investors interested in income will like the fact its 12-month trailing yield is 2.61%.

Bottom line: MCHI is a good, all-around China ETF.

China ETF — Guggenheim China Technology ETF (CQQQ)

Guggenheim185 150x150 3 China ETFs Worth Betting OnIt’s hard to bet on China without some exposure to technology. And if you’re technically inclined, this particular China ETF is a great way to bet on China’s future.

The Guggenheim China Technology ETF (CQQQ[9]) is the Chinese equivalent of the QQQ. At least 80% of its $70 million in total assets are invested in ADRs[10] or other commonly used depositary receipts. Tracking the AlphaShares China Technology Index, it seeks to follow the universe of publicly-traded companies in China and Hong Kong that participate in the information technology sector.

Rated four stars by Morningstar when compared with 20 other China ETFs, CQQQ invests 24% of its assets in mid caps and another 5% in small caps providing investors with a greater exposure to smaller Chinese stocks. Tencent Holdings (TCEHY[11]) is the largest stock, representing 11.1% of the ETF’s portfolio. Relatively expensive when it comes to technology ETFs[12] (with a 0.7% expense ratio), it’s not nearly as bad compared to the average MER for China ETFs.

If you don’t want to pay the MER but still want technology exposure I’d recommend you buy something like the SPDR Technology Fund (XLK[13]). However, if you don’t mind paying for excellence, then you’ll do fine by the CQQQ. Just remember that occasionally it can get quite volatile, which isn’t uncommon for China ETFs.

China ETF — Guggenheim China Small Cap ETF (HAO)

Guggenheim185 150x150 3 China ETFs Worth Betting OnAs every month passes, China becomes less like the wild west and more like a nation ready to be a developed market. It’s not quite there yet, but if China is on your radar I think it’s important that you at least consider a small-cap China ETF to round out your investment in the region.

For my money, the Guggenheim China Small Cap ETF (HAO[14]) makes more sense for the average investor than iShares’ MSCI China Small-Cap ETF (ECNS[15]). Despite the net expense ratio[16] 14 basis points higher than ECNS (at 0.75%), the HAO’s additional focus on financials and industrials — 35% of portfolio versus 30% for ECNS — provides extra stability should the move to domestic consumption not pan out as quickly as some anticipate.

Furthermore, HAO invests 45% of its funds in large-cap stocks[17], compared to just 9% for ECNS[18]. If things go south in China, I’d be more comfortable hedging my bets with larger companies. It’s not something I’d do with U.S. stocks, but when it comes to Chinese stocks I still believe discretion is the better part of valor.

When it comes to China ETFs, the No. 1 rule (as with any investment) is preservation of capital. In the long-term, I believe HAO will do a better job in this regard despite underperforming its peer over the past three years.

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As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

Endnotes:
  1. ETF performances: http://www.etf.com/component/content/article/116-etf-market-intel/21986-china-a-tech-etfs-worst-performers-of-april.html
  2. Hang Seng: http://money.cnn.com/data/world_markets/hang_seng/
  3. Shanghai SE Composite: http://money.cnn.com/data/world_markets/se_composite/
  4. domestic consumption: http://forumblog.org/2014/03/chinas-growth-trillion-dollar-question/
  5. MCHI: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCHI
  6. describes: http://www.ishares.com/us/literature/prospectus/p-ishares-msci-china-etf-8-31.pdf
  7. net expense ratio: http://www.ishares.com/us/products/239619/ishares-msci-china-etf
  8. financial stocks: http://etfs.morningstar.com/quote?t=mchi
  9. CQQQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=CQQQ
  10. 80% of its $70 million in total assets are invested in ADRs: http://guggenheiminvestments.com/products/etf/cqqq
  11. TCEHY: http://studio-5.financialcontent.com/investplace/quote?Symbol=TCEHY
  12. technology ETFs: http://etfdb.com/etfdb-category/technology-equities/?q%5Bs%5D=expense_ratio+asc#expenses
  13. XLK: http://studio-5.financialcontent.com/investplace/quote?Symbol=XLK
  14. HAO: http://studio-5.financialcontent.com/investplace/quote?Symbol=HAO
  15. ECNS: http://studio-5.financialcontent.com/investplace/quote?Symbol=ECNS
  16. net expense ratio: http://guggenheiminvestments.com/products/etf/hao
  17. 45% of its funds in large-cap stocks: http://portfolios.morningstar.com/fund/summary?t=HAO&region=usa&culture=en-US&ownerCountry=USA
  18. 9% for ECNS: http://portfolios.morningstar.com/fund/summary?t=ECNS
  19. ETF Insights e-letter: https://order.investorplace.com/?sid=FQ8126

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