Seeking Alpha
Profile| Send Message|
( followers)  

There are three distinct investment themes for profiting from China’s growth. One is to buy Chinese stocks. The second is to buy commodities and affiliated global companies such as miners and mining equipment makers. The third is to buy non-commodity multinationals that provide goods and services that Chinese citizens buy. There are many ETFs that can be used to invest in these three themes.

I created a portfolio, comprised of 33 ETFs, that cover these three themes. I will update this portfolio periodically, mainly through adjustment of relative weights, and provide a quarterly performance report. The portfolio’s nominal inception value is $100,000. My website presents the real-time portfolio value as well as each quarter’s begin/end values as separate sheets. In this article, I describe the rationale behind the composition of this ETF, and welcome any reader inputs.

My aim is to find the smallest number of ETFs that can adequately cover all the three themes. I try to minimize the overlap between the ETFs. The chosen ETFs are not necessarily the best in terms of low-cost or historical performance. Rather, they provide the optimal coverage through inclusion of many leading companies or commodities that I consider key beneficiaries of the secular China boom.

The weights are chosen to represent the anticipated long-term performance gain of that particular ETF due to China’s growth. I emphasize that this is intended to be a long-term buy-and-hold portfolio, so the focus is not on maximizing the current quarterly performance. I divide the portfolio into the three constituent components corresponding to the three themes.

The direct Chinese stocks portion (37%) of the portfolio is:

Symbol

Weight

Symbol

Weight

Symbol

Weight

PEK

8.34%

HAO

5.16%

EWH

1.96%

GXC

8.31%

CYB

3.82%

EWT

1.85%

ECNS

5.51%

TAO

2.05%

PEK covers the large-cap A-share market (the CSI 300), while GXC covers the large-cap and mid-cap Chinese companies traded outside the mainland. ECNS and HAO represent the small-cap Chinese companies. CYB is a pure-play on the Chinese currency. TAO covers the Chinese real-estate companies. EWH is the Hong Kong ETF that overlaps some with TAO, but also represents other Hong Kong companies which also have mainland businesses. EWT is the tech-heavy Taiwan ETF; most of these Taiwanese companies derive a large portion of their revenues through operations in China.

The commodities portion (42%) of the portfolio is:

Symbol

Weight

Symbol

Weight

Symbol

Weight

IAU

3.60%

SLV

2.79%

GDXJ

2.12%

MOO

3.34%

DBA

2.58%

SIL

2.01%

IXC

3.15%

DBC

2.39%

PPLT

1.44%

MXI

3.08%

CUT

2.32%

PALL

1.19%

PIO

3.08%

GDX

2.24%

REMX

0.84%

COPX

2.90%

USCI

2.19%

URA

0.74%

IAU and SLV are pure-plays on gold and silver, respectively. GDX, GDXJ and SIL cover gold and silver miners. DBA is a pure-play on agricultural commodities, while DBC and USCI track a diversified index of commodity futures. While USCI and DBC are somewhat duplicative, USCI actively manages for Contango. PPLT and PALL are pure-plays on platinum and palladium. MOO covers agricultural companies, IXC covers global energy companies, COPX covers copper miners, and URA covers uranium miners. REMX benefits from rare-earth export quotas imposed by China. MXI is composed of global materials companies like BHP and Vale (NYSE:VALE) that export commodities to China, while CUT benefits from timber exports to China. PIO covers water infrastructure companies, many of which are active in China.

China is the main driver of the commodities boom that benefits these ETFs. This justifies the rather large weighting for this particular theme in the portfolio. I expect that over time, the direct Chinese stocks theme will outweigh the commodities theme as China completes its infrastructure build-out and the demand for some of these commodities slows.

The non-commodities multinationals portion (21%) of the portfolio is:

Symbol

Weight

Symbol

Weight

Symbol

Weight

IXJ

5.49%

RXI

2.73%

IXG

1.23%

KXI

4.49%

EWY

1.95%

EXI

3.45%

EWS

1.68%

IXJ covers the global healthcare giants like Pfizer (NYSE:PFE) and Novartis (NYSE:NVS) which are all doing well in China. Healthcare is perhaps the most promising area for multinational companies in China, hence the over-weighting of healthcare within this theme. KXI is composed of global consumer staples companies like Nestle (OTCPK:NSRGY), Coca-Cola (NYSE:KO) and Danone (OTCQX:DANOY). Global brand-name processed food products companies also have bright prospects in China, given all the scandals surrounding tainted Chinese food products.

EXI covers global industrials like GE, Siemens (SI) and Boeing (NYSE:BA). While a couple of the names in this ETF, like Caterpillar (NYSE:CAT) and Komatsu (OTCPK:KMTUY), belong in the commodities theme, I couldn’t find a suitable commodity ETF that included these industrials; so, they go here. RXI includes discretionary brands like Disney (NYSE:DIS) and Toyota (NYSE:TM) which benefit from China. Many luxury brands makers like LVMH (OTCPK:LVMUY) and Daimler (OTCPK:DDAIF) are also included in RXI.

EWY is the Korean ETF which includes giants like Samsung (OTC:SSNLF) and Hyundai (OTC:HYMLF) which are doing quite well in China. EWS is the Singapore ETF which includes real-estate companies like Capitaland, which are landlords in China. IXG covers global financial giants like HSBC (HBC) and Goldman Sachs (NYSE:GS), which have thriving businesses in China and Hong Kong.

While the relative weights are clearly subjective, I believe these 33 ETFs provide a good coverage of the China Play investment concept. Again, I welcome any inputs and suggestions for changes.

Source: Profiting From China's Growth: My Portfolio of 33 ETFs

Additional disclosure: I am long most of the ETFs mentioned in this article, either directly, or through their component stocks.