Claymore's New ETF: The TAO of Investing in Chinese Real Estate

On December 18, Claymore Securities made good on its promise to increase its ETF offerings by adding a vehicle for folks to diversify into the historically low R^2 world of real estate investment. The ETF is international in nature, with a 100% Chinese weighting.

Launched as The Claymore/AlphaShares China Real Estate ETF (TAO), the vehicle "seeks investment results that correspond generally to the performance, before…fees and expenses, of…the AlphaShares China Real Estate Index." More specifically, the fund seeks a correlation of 0.95 or better to its guiding index by investing in common equities of public companies, as well as in real estate investment trusts. The folks at Claymore will normally invest at least 90% of TAO's total assets across a broad range of share classes, including mainland shares whenever possible, ADRs, ADSs, GDRs, and IDRs. Further, investments in Chinese special administrative regions (including Hong Kong and Macau), are fair game.

TAO is structured as a proxy for the mainland Chinese real estate market, and, as such, is heavily influenced not only by infrastructural development in China, but also by the machinations of the broader financial sector. Initially offered with an expense ratio of 0.65%, TAO debuts with roughly $4.7M in managed assets and 200,000 outstanding shares. As of December 17th, the fund was arranged as such:

• Large-cap: 58.83%
• Mid-cap: 35.40%
• Small-cap: 5.77%

And its top holdings were:

• Wharf Holdings, LTD: 5.35%
• Sun Hung Kai Properties: 5.28%
• Swire Pacific, LTD: 5.14%
• New World Devel. Co. LTD: 5.13%
• Sino Land Co.: 5.06%
• Cheung Kong Holdgs, LTD: 5.04%
• Henderson Land Devel. Co.: 4.97%
• Hang Lung Properties, LTD: 4.93%
• Hong Kong Land Holdgs, LTD: 4.72%
• China Overseas Land & Investment, LTD: 4.65%

When reviewing Claymore's list of 47 components, one finds that currently none of its holdings are available for direct trading on any US markets, though investors are able to purchase the majority of these companies through the Hong Kong markets.

CNBC's Erin Burnett and Mark Hainese interviewed Christian Magoon, Senior Managing Director and head of the ETF Group for Claymore, this morning in conjunction with Claymore's ringing the Opening Bell to welcome TAO's debut on the NYSE.

Burnett opened by suggesting that many investors are interested in the Chinese real estate markets, but "understand that they're …difficult to navigate."

Magoon assured investors that, regardless of ETF components, the majority of revenue must come from PRC/HK/MC and that "purity is a big issue." Thus, for companies whose business models include real estate in addition to other components, a significant amount of revenue must be from real estate to avoid being not included in the index. Magoon also suggested that

In the next five years, 1.5B sq ft of space will be built out in China…and this [ETF] is a way – for the first time – for US investors to take part in real estate pure plays that have changed China's landscape and its state bird to the construction crane.

Haines then wanted to know if the ETF were diversified across opportunities in apartments, office space, land, etc. Magoon remarked that "it is diversified," further stating that there are only "two ways in the ETF space to play the China market…and that both of those ETFs have zero security overlap with this new real estate ETF." (Presumably, Magoon misspoke and was referencing one of the following four ways to pureplay China with ETFs: Powershares' (PGJ), iShares' (FXI), ProShares' (FXP), or SPDRs' (GXC).)

Haines also wanted to know if the ETF were "holding products of a bubble", saying that he was old enough to remember, for example, that "at one point, the Imperial Palace in Japan was 'worth' more than the entire state of California on paper." In other words, Haines was concerned about property valuations within the real estate investment segments, and how they would affect the ETF's underlying securities' valuations. Magoon said that there currently are concerns – short term, and that "we have to be concerned about a bubble". Over the long term, though, he remarked that they're bullish because of the nation's growth, but cautiously optimistic overall.

While real estate traditionally has a relatively low R^2 (the IYR currently correlates to the S&P500 by 47.65%), we must not forget that low R^2 does not mean low volatility. While an R^2 value between 40 and 50 is most likely, it is also likely that this TAO's beta is likely to be higher than IYR's (currently at 1.45). There is also a concern about trading volume: as of 11.18AM on its debut morning, TAO's traded just 51,500 shares, and the current spread is $0.10.

Still, for those who are interested in tapping China's burgeoning real estate market – and for increasing their mid-cap and large-cap exposure, TAO provides investors with a unique opportunity to at least diversify across a sector, rather than trying to bet on, say, only Swire Pacific as a proxy for the entire real estate market.

Invest soundly.

Source: Claymore Securities

Disclosure: The author has no position in TAO.

Comments

[Chas:]

Cheung Kong Holdgs can be purchased in US under: CHEUF.PK

2007 Dec 19 09:32 PM