Emerging Market ETFs: China

Includes: CHXX, FXI, HAO, TAO
by: Simple Qualitative

As of late, the Shanghai Index as well as the entire China sector has performed very well due to the strong economic data. The World Bank raised their estimate for Chinese GDP growth in 2013 from 8.1% to 8.4%. They attributed the increase to government stimulus, monetary easing, and an upswing in the business cycle. As of late, strong PMI data has signaled an expansion in manufacturing activity. Below, I will highlight four exchange traded funds which offer investors exposure to infrastructure, large-caps, real estate, and small-caps within China.

EGShares China Infrastructure ETF (CHXX)

For investors looking for exposure to China's urban growth, the EGShares China Infrastructure ETF may be your vehicle. The fund was designed to replicate the performance of the Indxx China Infrastructure Index. The fund is composed of thirty different holdings with an average market cap of $11.72 billion. The current sector breakdown is as follows:

Sector % of Fund
Industrials 47.50
Basic Material 13.28
Utilities 11.64
Telecommunications 10.06
Financials 9.20
Oil & Gas 8.33

The index includes exposure to the metal miners, energy and power producers, transportation, utility, and water companies. The current industry breakdown is as follows:

Industry % of Fund
Construction & Materials 26.40
Industrial Engineering 21.09
Industry Metals & Mining 13.28
Electricity 9.67
Real Estate Investment & Services 9.20
Oil Equipment, Services & Distribution 5.52
Fixed Line Telecommunications 5.30
Mobile Telecommunications 4.76
Alternative Energy 2.81
Gas, Water & Multiutilities 1.97

Currently, the expense cap is 0.85%. Be aware that the fund's market is fairly illiquid compared to larger index exchange traded funds.

iShares FTSE China 25 Index ETF (FXI)

The FXI is composed of 25 large-cap very liquid Chinese companies. The fund is heavily exposed to the financial sector but offers investors a safer investment vehicle compared to its small-cap alternatives. The current sector breakdown is as follows:

Sector % of Fund
Financials 59.22
Telecommunication 16.92
Oil & Gas 14.15
Basic Materials 7.82
Industrials 1.80

On a valuation basis, the FXI remains relatively inexpensive with a P/E ratio of 13.96 and a price-to-book ratio of 1.73. When compared to other emerging market ETFs, you will find the valuation attractive considering the growth prospects in the year ahead. The fund currently has a 12-month yield of 2.36% with an expense cap of 0.72%.

Guggenheim China Real Estate ETF (TAO)

For investors looking for exposure to China's real estate industry, the Guggenheim China Real Estate ETF may do the trick. The fund seeks to replicate the performance of AlphaShares China Real Estate Index. The TAO is composed of 47 securities with the majority of their revenue coming from real estate development, management, and ownership of property. The geographic breakdown is as follows:

Geographic Weighting
Hong Kong 81.49%
China 17.18%
Singapore 1.27%

Currently, the expense cap is 0.65%. Chinese regulations make it difficult for foreigners to invest in real estate, but this fund may offer investors an investment vehicle.

Guggenheim China Small Cap ETF (HAO)

For the investor looking for a little more risk, the Guggenheim China Small Cap ETF seeks to replicate the performance of the AlphaShares China Small Cap Index. The HAO will benefit greatly as China's consumer spending grows because that spending will directly benefit the companies which target Chinese consumers. The fund currently is invested in 226 China-based companies with market capitalization of less than $1.5 billion. The current HAO sector breakdown is as follows:

Sector % of Fund
Industrials 24.38
Financials 18.68
Consumer Discretionary 14.43
Materials 13.10
Consumer Staples 9.58

Compared to the FXI, the HAO has a significantly lower weight in the financial sector and has about 9 times as many companies in the fund. Currently, the expense cap is 0.70%. Over the last couple of years, there has been concerns over the accounting practices of many small-cap Chinese companies which remains one of the key risks to this fund.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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