The China ETF Dilemma

by: Ezra Marbach

A recent article in Business Week discusses new ways to invest in China. Wall Street has introduced two exchange-traded funds (ETFs) that bundle Chinese stocks into easy-to-trade securities. The problem is differentiating between the iShares FTSE/Xinhua China 25 Index Fund (NYSEARCA:FXI) and the Golden Dragon Halter USX China Portfolio Index Fund (NASDAQ:PGJ).

The ETFs have a lot in common. iShares consists of only 25 stocks and Golden Dragon 43.They are both highly concentrated in telecommunications, energy and information technology companies. Furthermore, they both contain a number of the same companies including China Mobile (NYSE:CHL) and PetroChina (NYSE:PTR).

Differences? Golden Dragon is comprised of U.S. exchange-listed ADRs of companies that derive a majority of their revenue from mainland China. These companies are required to meet US accounting standards. iShares is skewed toward Hong Kong-listed companies, which don't have to follow the same SEC regulations.

Thoughts: Both FXI and PGJ give investors simple ways to invest in China and diversify their assets without having to spend much time researching individual companies. While Golden Dragon has a lower expense ratio (0.6%, vs. iShares' 0.74%.), iShares provides opportunities to invest in stocks listed on the Chinese and Hong Kong markets. Either way, keep in mind that FXI and PGJ's high concentrations of capital in few industries where the government continues to wield a strong hand is an issue investors should definitely be wary of.

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