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Your Best ETF to Play China’s Resurgence in 2014

Play funds, not stocks, to follow the money into China this year


U.S. equity was all the rage in 2013.

But a new year undoubtedly means the old winners will fall away and new opportunities will arise. And that means you need to follow the money to create the biggest returns in 2014.

So this January, follow the money into China.

lippermutfflows3Consider that in both October and November, world equity funds attracted the lion’s share of investor inflows. Specifically, according to Lipper, 31% of new mutual fund money went global in October and 55% went to world equity funds in November — showing the pace is accelerating.

That trend is sure to continue, specifically in regards to China-focused funds. Fund data provider EPFR Global noted that Chinese equity funds saw inflows hit a 45-week high just after Thanksgiving thanks to reform hopes that would keep the economy there humming along.

Money clearly is moving into China in 2014. And you want to be there.

China Is Cheap

The good news is, there’s still plenty of time to buy into China.

China stocks are trading for a huge discount compared to the S&P 500. Right now, Shanghai stocks have an average price-to-earnings ratio of around 11, vs. a current P/E of around 20 for the S&P 500.

The latest China PMI numbers from December did show a slowdown from November’s growth in Chinese manufacturing, but still marked the fifth straight month of overall expansion.

And China just projected its GDP likely grew at 7.6% in 2013 — above the 7.5% forecast set in March, and down only 0.1 percentage points from 2012 GDP.

These are just hints of stability, but more encouraging numbers in 2014 are sure to spark big upside.

Your Best China ETF to Buy

There is no doubt that China is evolving from an emerging economy to a developed one, and that evolution is going to come with growing pains. But there also is a lot of opportunity if you invest responsibly in the region.

To me, the best way to play China and mitigate the risk there is a broad play via funds. That ensures you’re not putting all your cash in just a few risky stocks that could hit a rough spot, and that you cast a wide enough net to catch some big breakout winners in the new year.

It also helps that many instruments allow you to play China stocks that don’t list on the NYSE, giving you ease of trading in this market without the hassle of a foreign-denominated currency or weird market hours.

A lot of investors like the popular iShares FTSE China Large Cap ETF (FXI) to play China, but I dislike the weighting in this fund. FXI has a massive 40% allocation to its top five holdings that include Tencent Holdings (TCEHY), China Mobile (CHL) and major Chinese financials.

Instead, I recommend the SPDR S&P China ETF (GXC). While it holds many of the same stocks as FXI, it’s cheaper at 0.59% in annual expenses vs. 0.74% for FXI, and is a bit more diversified — only five stocks are allocated at more than 3% of the fund, and no pick takes up more than 7%.

GXC also gained about 7% in 2013 vs. a loss of 3% for the iShares fund.

Read more about the SPDR S&P China ETF here on the official site.

Jeff Reeves is the editor of and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at or follow him on Twitter via @JeffReevesIP

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