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, Random Roger (186 clicks)
Portfolio strategy, ETF investing, foreign companies
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Van Eck on Thursday listed the Market Vectors China ETF (NYSEARCA:PEK) which will capture the Shanghai Composite Index, aka the A-share market. If you have any interest in the fund you need to read the particulars, most importantly that the fund will not own the stocks but derivatives to replicate the index.

This sort of composition creates concerns for some that something can malfunction as there have been malfunctions in other non-plain vanilla funds occasionally in the past. While I won't set unrealistic expectations about any potential malfunctions (like counterparty risk or some sort of market seize-up) I will say that fund malfunctions thus far have only occurred during times of extreme market trauma.

The Shanghai market is not really accessible (look up QFII if you want more details) and one day it will be. There are obviously a lot of stocks in China. Many of these stocks have listings on other markets too but the closed nature of the A-share market has caused huge price discrepancies between A-share listing and listings in other markets. This has not had much front burner attention lately but to the extent this issues exists it could be less if that market opens up.

If you've ever looked under the hood of any Chinese indexes you will see some interesting stocks. China funds, including PEK, can be difficult to own because of how heavy they are in financial stocks. We know there is over-capacity in real estate, the provinces have what amounts to off balance sheet debt and there is ongoing real estate speculation that the government doesn't quite know what to do with. These things in varying ways threaten financial stocks and instead of trying to sort this all out I think it makes more sense to seek other parts of the market that are not in the direct line of fire for these issues.

Globalx has six sector funds and plenty of the names in those funds cross list in Shanghai but where there is now one ETF that sort of gets in broadly it makes sense to expect narrower access to the A-share market in the future.

On the road to ruling the world China will have boom times and there will also be mistakes that impede that market. As difficult as it sounds the ideal access to China will include catching the upside while avoiding the parts of the market that are most at risk to total meltdown. This requires work but is not impossible. At its low, XLF was down 83%. How many of your holdings went down less than 83%? Well then you avoided that which melted down the worst with some portion of your portfolio in the US and so could probably so the same with another country. What is a particular country most vulnerable to? Whatever you think that is, avoid or underweight it.

Disclosure: None

Source: An ETF Door Opening Part of the Way