Too Much Financial Sector Exposure in the Latest China ETF?

Wall Street, “Main Street,” politicians and philosophers continue to debate the reason for the housing collapse/credit crisis/global economic pandemonium. The differences of opinion may rage on for decades.

Unfortunately, it will always become a “which-came-first-chicken-or-egg” argument. Was it the ever-greedy chain of business people… from the greedy mortgage broker to the greedy lender to the greedy “Wall-Streeter” who sliced/diced sub-prime loans into tradeable (now toxic) securities? If so, is more regulation of financial entities the way to stop them from deliberately misleading the public?

Conversely, was it the tyranny of good intentions, such that the federal regulatory agencies forced banks to lend to people who they hadn’t been lending to for decades? For instance, was it the revamped Community Reinvestment Act that effectively demanded lower underwriting standards so that the dream of “universal home ownership” could be realized?

Ironically enough, some of the same debates are playing out in healthcare reform. The goal of “universal health care” may be desirable, much like “universal homeownership.” Yet I haven’t found a doctor who thinks health care will be more innovative with top-notch doctors and top-notch drug development with government involvement.

Bringing this back around to the financial sector’s impact on overall market-based investing, Claymore Securities has launched the Claymore Alphashares China All-Cap (YAO). Long-time readers and radio-show/podcast listeners remember my affection for Claymore Small Cap (HAO), which does an excellent job of tapping potential growth of the domestic Chinese consumer.

In reviewing, All-Cap YAO, however, I am moderately concerned by a 35% weighting in financial stocks. (Note: The next biggest participants include Energy and Technology at 18% and 11.5% respectively)

It’s not unusual for single-country ETFs outside of the U.S. to have large weightings in Financials; in particular, those companies are the largest market cap leaders and they’re the most visible.

However, some analysts believe that there is a huge real estate bubble in China; perhaps properties are wildly overvalued. Expectations for a 50% drop in China real estate are not uncommon from some writers.

Are we to believe that U.S. financial companies are the only ones who would put forward unsound loans in the name of corporate skullduggery? Is it possible that financial institutions around the world may also be prone to scandal or malfeasance? Or, even everything is on the up and up in China corporate finance, wouldn’t a real estate drop of 50% in China go a long way towards crushing financial stock performance?

I don’t know the answers. But I do know, it’s worth considering the risks. Here, then, are the most common China ETFs with respective exposure to the financial sector:

China ETFs and Exposure to the Financial Sector
						% Weight
PowerShares Golden Dragon Halter China (PGJ)						6.7%
Claymore China Small Cap (HAO)						14.8%
FirstTrust Chindia (FNI)						22.6%
Morgan Stanley China (CAF)						22.9%
SPDR S&P China ETF (GXC)						33.2%
Claymore China All-Cap (YAO)						34.8%
iShares FTSE China Hong Kong Listed (FCHI)						43.7%
iShares FTSE China 25 Index (FXI)						50.1%

It’s not that financial segment participation should be avoided at all costs… on the contrary! In other parts of the world, insurance, banking and investment are heavy growth industries. That said, more than 20% in any particular segment is often worth keeping an extra “tab” on.

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[SeekingTruth:]

Gary,
Just learned about the new China ETF in last couple of days and you are on the timely spot with this excellent info.
Relative to your leading comments:
Sometimes the question is not whether it is a "chicken or egg" situation because many times in finance as well as in life it is CHICKEN SALAD (both Chicken AND Egg) and sometimes it is Chicken S--- something else.
Any one who is less concerned about legalized racketeering than they are about reasonable rules, laws, and alternatives had better get ready for a lot more legalized racketeering.
Include me out please.
Thanks again for your excellent and timely ETF info and thoughts. I greatly appreciate it.

Oct 20 10:12 AM