The Best China-Specific ETF? The Answer May Surprise You
China-Specific ETF A New Profit Earner Emerges
Perhaps no segment of the equity ETF universe epitomizes the rapid growth of ETFs as an asset class than ETFs that focus on China. That’s probably not a coincidence as U.S. investors have craved new ways to tap into the China growth story. When you factor in the Taiwan and Hong Kong-specific ETFs, the number of ETFs offering China exposure to U.S. investors is around 20. That’s roughly triple the amount that were available in 2008.
Twenty is a high enough number to make selecting the right China ETF a confounding endeavor. Everyone knows about the iShares/Xinhua FTSE China 25 Index (NYSE: FXI). FXI is the most heavily traded China ETF and has over $8.1 billion in assets, but only holds 25 stocks with a somewhat risky 47% weight to financials.
The best performing China ETF thus far in 2010 has been the Claymore/AlphaShares China Technology ETF (NYSE: CQQQ), but this is a relatively new entrant to the China ETF fray and daily volume is slight at less than 23,000 shares. Our choice as the best China ETF is the Claymore/AlphaShares China Small-Cap ETF (NYSE: HAO).
HAO has almost $317 million in assets and is up 8% year-to-date, making it the second-best performer among China ETFs behind CQQQ. HAO holds 157 stocks with a maximum market cap of $1.5 billion and at the sector level, HAO is far more diverse than FXI. Five sectors have double-digit weights in HAO, led by industrials at about 28.5%.
HAO and FXI have no overlap, so investors could theoretically own both at the same time, but HAO offers the better exposure to China’s diversifying economy. The potential emergence of a real middle class in China makes HAO a compelling long-term play as well.