Which China ETF is Right For You?

by Will Ashworth | February 14, 2014 9:53 am

When you look at how low China’s valuation is, it seems crazy not to invest something there.

china-etfChina’s estimated 2014 P/E ratio is 8.1, cheaper than all other major world markets. Even harder to comprehend is the fact that smaller emerging markets such as Argentina and Turkey are more expensive. China’s stocks have never been cheaper. JPMorgan expects a 15% to 20% bump in the coming weeks as investors look for value in the world’s second largest economy.

So, how do you take advantage of this value play?

Well, you could buy a few blue-chip Chinese stocks listed in the U.S. But why buy one or two when you can get broader exposure with an exchange-traded fund? A better move would be to buy a China ETF that gives you the exposure you’re looking for. Here are three funds I think will do the trick.

Compare Brokers[1]

China ETF With Reasonable Fees

china-etf-ewhWhile low fees don’t guarantee better performance, they certainly can’t hurt. According to ETF Database, there are seven China ETFs with five-year track records. Of those the iShares MSCI Hong Kong ETF (EWH[2]) has the cheapest management expense ratio at 0.51% annually — or $51 per $10,000 invested.

Its biggest holding is AIA Group (AAGIY[3]), the largest independent, publicly listed pan-Asian life insurance company, with a weighting of 16%. The top 10 holdings account for 61% of the ETF’s $2.1 billion in total net assets. Financial stocks represent a lion’s share of the portfolio with a 58% weighting. Consumer discretionary, industrials and utilities represent most of the remaining assets.

If you’re as fascinated by conglomerates as I am, you’ll like the fact its third-highest weighting is Cheung Kong Holdings (CHEUY[4]), the personal holding company of billionaire Li Ka-shing. Its performance hasn’t been that great compared to its real estate peers, but that’s partly due to its conglomerate discount.

It’s important to keep in mind that this China ETF tracks the MSCI Hong Kong Index, which invests in stocks traded on the Hong Kong Stock Exchange. Many of these companies have significant business interests outside China, providing some additional geographic diversification. With little turnover (12% in latest fiscal year) it’s a good buy-and-hold proposition.

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Power to the People

china-etf-pgjLooking to the mainland, one of the better performers over the past five years is the Power Shares Golden Dragon China Portfolio (PGJ[5]), a China ETF that invests in companies deriving a majority of their revenue in the People’s Republic of China.

More China-centric than EWH, it’s composed of 72 stocks participating in a total of 10 sectors with technology and consumer discretionary stocks representing 78% of the $306 million in total net assets. Its top 10 holdings have a 53% weighting, with the remaining 62 stocks accounting for 47% of the portfolio. Far less concentrated than EWH, it’s a good ETF to own if you believe in the power of numbers.

From a cost perspective, it’s MER of 0.70% is 18 basis points higher than the EWH. However, its performance over the last five years — annualized total return of 18.4% through February 12 — has been nearly identical. A look back at the two funds’ performance over the past decade shows they each got to the same result in entirely different ways. If volatility isn’t your thing, PGJ might not be the right China ETF because its annual returns have been all over the map.

All the stocks in PBJ are listed on U.S. exchanges, so it’s possible for someone to recreate the portfolio by purchasing all 72 of its stocks. But the whole point of this article is to avoid having to do that by investing in a China ETF instead. While I don’t profess to be intimately aware of Chinese stocks, there are some names in the top 10 that I recognize such as China Mobile (CHL[6]), which has begun selling iPhones in China[7], Ctrip (CTRP[8]), China’s biggest online travel company, and Vipshop (VIPS[9]), China’s big player in e-commerce flash sales. If you can handle the bumps along the way, it’s certainly a good China ETF.

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Small But Powerful

china-etf-ecnsFor those who are really adventurous, I suggest the iShares MSCI China Small-Cap ETF (ECNS[10]), a collection of 353 Chinese stocks with smaller market caps than those of either EWH or PGJ.

While the fund and index it tracks are considered small caps, Morningstar suggests it’s more mid-cap in nature, with the average market cap at $1.1 billion along with a maximum market cap of $4.4 billion. Whatever you want to call it, I don’t think this China ETF is intended for the risk-averse.

If you’ve heard of any of the names in its top 10 holdings I’d be very surprised. Given the relative anonymity combined with the fact these are small- and mid-cap stocks in China, it’s a very good thing that there are 358 holdings with only 12.6% of the portfolio in the top 10. The remaining 348 stocks have an average weighting of just 0.25%. A lot can still go wrong, mind you, but with the bets spread out as they are the downside is somewhat restrained.

The average investor considering a new move into China should probably only buy ECNS in combination with EWH or another large-cap China ETF. Allocate 75%-85% of your committed dollars to the large-cap and the remaining 15%-25% to ECNS. Some might consider this overly conservative, but I’d rather be safe than sorry.

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

  1. Compare Brokers: https://investorplace.com/options-trading/broker-center/
  2. EWH: http://studio-5.financialcontent.com/investplace/quote?Symbol=EWH
  3. AAGIY: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAGIY
  4. CHEUY: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHEUY
  5. PGJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=PGJ
  6. CHL: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHL
  7. iPhones in China: https://investorplace.com/2014/01/aapl-stock-apple-china/#.UvzkpnmfMpE
  8. CTRP: http://studio-5.financialcontent.com/investplace/quote?Symbol=CTRP
  9. VIPS: http://studio-5.financialcontent.com/investplace/quote?Symbol=VPS
  10. ECNS: http://studio-5.financialcontent.com/investplace/quote?Symbol=ECNS

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