Worries over the Chinese economy are now reaching a fevered pitch as we approach the final stretch of 2012. Concerns are stemming from wavering demand from key export markets like Europe, while worries also persist over domestic growth rates and a shaky leadership transition as well.
With this backdrop Chinese securities, which were once among the most popular in the world, are now shunned by most investors due to the high risk nature of the market and the relative uncertainty of the country in the near term. This is especially true given that the American market has performed well so far in 2012, leaving many short-term investors to wonder why they should bother with a high risk market like China when decent choices are available on their front door.
In fact, in this environment, the most popular China ETF currently on the market, the iShares FTSE China 25 Index Fund (FXI) is actually posting a loss on the year, currently around -0.75%. While this isn’t too bad overall, in the scheme of things, when compared to broad markets in other corners of the world it is especially terrible news (see China ETF Investing 101).
For example, SPY—representing the American market has added close to 15% on the year, while Canada (EWC) and the United Kingdom (EWU) are both up about 7% as well. Meanwhile, other emerging markets have also put China to shame so far in 2012 as ETFs tracking South Africa, Poland, and Malaysia are all outpacing their more famous—and larger—counterpart on a year to date look.
In light of this, many investors are probably thinking about abandoning Chinese stocks for the time being, at least until the economic situation improves. However, this overlooks how many options are currently out there in the China ETF world and that investors no long have to pick FXI or nothing.
Instead, current options delve into not only a number of Chinese sectors, but various market capitalization levels as well, giving investors a wide choice of ways to play China. So while the broad market in China may be slumping, as represented by the financials heavy FXI, there are plenty of Chinese sectors and funds that are still ‘muddling through’ and are up on a year to date look (read Five ETFs to Buy in 2012).
Not only are they up YTD, but they could also potentially be more resistant to shocks in the broad Chinese market making them better ways to gain exposure to the nation if worries persist in the nation. So for investors looking for more resilient Chinese ETFs, any of the following diversified funds could make for interesting picks during the current market environment:
iShares MSCI China Index Fund (MCHI)
This large cap focused ETF from iShares also tracks the China market but does so by following the MSCI China Index. This benchmark provides exposure to over 140 different companies while charging a modest 0.58% in fees per year.
Exposure is tilted towards financials, although they make up about 30% of assets compared to over half in FXI. Rounding out the fund is 18% in energy, and 14% in telecom, while assets are relatively well spread out from an individual security perspective as well.
The product is up about 4.4% YTD and it pays a decent yield of 2.2%, so while it certainly isn’t a high yielder, it has been a decent performer so far in 2012 (also see Frontier Market ETF Investing 101).
SPDR S&P China ETF (GXC)
From State Street comes this ETF which also has a large cap focus, GXC. The fund tracks the S&P/Citigroup BMI China Index, thus giving investors exposure to about 210 firms while charging 0.59% a year in fees.
Financials again take the top spot, but at just 26% of assets, while energy, technology, and telecom round out the top four. From an individual security look, China Mobile takes the top spot, followed by China Construction Bank and the Industrial & Commercial Bank of China (read Emerging Markets Dividend ETFs for Income & Growth).
So far in 2012, GXC has added about 4.5% YTD, beating out FXI by nearly 525 basis points in the time frame. Meanwhile, the yield is rather solid at 2.3% while the daily volume suggests tight bid ask spreads for this popular product.
Guggenheim China All-Cap ETF (YAO)
For investors looking for more of a broad look at the Chinese market, there is Guggenheim’s relatively unknown YAO. This fund tracks the AlphaShares China All Cap Index which holds about 183 stocks in its basket and charges 70 basis points a year in fees.
Once again, financials take up the biggest spot in the fund at 29%, although energy and technology also combine to make up more than 30% as well. Small and mid cap securities receive a decent chunk in this fund too, as they comprise just over one-fourth of the holdings, giving the product more of a tilt towards local China firms (see Three Overlooked Emerging Market ETFs).
The product has performed the best of the group, adding more than 6.9% year-to-date. Dividends are also decent at just over 2.5%, although the relatively low asset base and volume could produce wider bid ask spreads than some of the other products on the list.
[Investors should also note that the Guggenheim China Real Estate ETF (TAO) easily crushed the performance levels in the above three funds. The product, however, is nearly 75% in Hong Kong securities, so this and the real estate focus probably helped propel the product to a market crushing 37% return in the YTD period)]
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