Here at the 4th Annual Inside ETFs Conference at the Westin Diplomat in Hollywood, Florida, I am beginning to go “stir crazy.” Granted, I’ve had the opportunity to hear Ben Stein deliver an entertaining keynote presentation. And yes… Bob Pisani of CNBC fame really does wear those brassy neckties.
With that said, I’m worn out. I’ve been shaking hands with VIPs, bigwigs and “next-gens” for three days now. I didn’t travel clear across the country to schmooze… I came to speak to financial advisors about accessing Asia with ETFs.
So now that it’s my turn, I thought, why don’t I publish several key themes from my presentation. Not only will it help me clarify my ideas, but it will give readers a chance to evaluate some of what will transpire at Tuesday morning’s (2/8/11) breakout session.
Theme #1: For those in the investment world who choose to buy-hold-n-hope, your best alternative for an all-access pass to Asia is iShares All Country Asia ex Japan (AAXJ). Of all the many possibilities, AAXJ is currently the most diversified across different sectors and different countries, with 25% in China, 17% in South Korea, 13% in Taiwan, 11% in Hong Kong, 10% India, 10% Singapore and the rest spread across Asian emergers.
Naturally, you do have other options. For instance, iShares S&P Asia 50 (AIA) covers China and the “Asian Tigers” (i.e., Hong Kong, Taiwan, South Korea, Singapore). Yet, you might not be thrilled with the lower trading volume, the 12% exposure to one company (e.g., Samsung) or the absence of emerging markets like Thailand, Malaysia and Indonesia.
You might also have wondered about PowerShares BLDRS Asia ADR (ADRA). However, when you’ve pondered getting more money into Asia, you probably weren’t seeking a fund with 68% exposure to the developed markets of Japan and Australia. There’s also SPDR Emerging Asia Pacific (GMF), yet you probably aren’t intrigued by the volatility and/or the narrow focus of an all-emerging Asia choice. It follows that the straight-up-now-tell-me selection is the iShares All Country Asia ex Japan (AAXJ).
Theme #2: If you’re not a buy-n-holder - if you’re an active manager of money - a direct investment in a China-only ETF hasn’t looked this appealing in a long time. Consider the following:
A. Fundamentals. The MSCI China Index trades at 11.5x forward earnings, the lowest forward multiple since 2004. With Hong Kong trading at nearly 18x forward earnings, the disparity is at or near a record.
B. Economic. China has raised bank reserves 7 times and interest rates twice. Inflation is running at 5%, which is nowhere near the 20% inflation seen in the 1990s. While inflation may be running a bit high, China is taking the precise steps needed to rein it in, unlike the central banks of developed countries. And China is still an economic growth machine.
C. Contrarian. Many a wise man has suggested buying when everyone is fearful. Well, nobody is buying China due to overblown fears about inflation and panic about a possible “property bubble.” Unlike U.S. citizens who bought homes with 10%, 5%, or nothing down, and greedily went after cash-out refis, the vast majority of Chinese put down 40% or 50% on property purchases. Even a real estate decline won’t derail China’s ever-increasing middle class.
The iShares MSCI China Index ETF may not have launched yet. When it does I will be monitoring its progress.
In the meantime, there are plenty of reasons to keep an eye on the SPDR S&P China Fund (GXC). I expect it to drop a bit further, possibly testing its 200-day moving average. A pullback of 12%-14% from GXC’s November peak is my anticipated entry point.
Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.