Chinese ETF Sectorology: Industrials vs. Consumer Goods

Includes: CHII, CHIQ
by: Roger Nusbaum

As mentioned the other day, the first of the China sector ETFs are up and running. GlobalX launched an industrial sector fund with ticker CHII and a consumer fund with ticker CHIQ. The original filing also included funds for financials, energy, technology and materials which IndexUniverse thinks will be out soon.

On Tuesday, the consumer fund traded 51,000 shares while the industrial fund traded 40,000. That seems pretty good for day one but volume will need to pick for the funds to be widely lauded as successful. As for why GlobalX chose to start with these two funds, IndexUniverse quoted GlobalX CEO Bruno del Ama as saying that the industrial sector is the China of today, while the consumer fund is the China of tomorrow.

Along those lines, the industrials capture the build up and out of the country. As the rural population urbanizes, one way or another, the build out will continue. At some point China runs into a demographic problem, similar to Japan. The most pessimistic estimate I've seen as to when this will start is the middle of the next decade. Regardless of when that might happen, I would start to favor (staples over discretionary) the types of companies in CHIQ. By then the middle class will have blossomed and be spending money on better food, better decor, better gadgets and so on (remember the growth in demand for these things is likely to come from the as yet unurbanized portion of the population).

The industrial fund has what looks like a good mix of groups with similar weightings in engineering, equipment, transportation and building materials (several cement companies) and then another 5% in industrial services. The consumer fund is heaviest in retail, food and consumer services then much smaller weightings in autos, healthcare, beverages and household goods.

A huge positive about these funds that I presume will apply to the the other GlobalX China sector funds is that 4.75% is the largest a holding will be in the funds. Obviously a stock can grow some above than number but it would get rebalanced down. A stock weighing 9-10% of a fund is not the worst thing in the world but 4.75% is better.

One other thing to point out, not so much about the funds but some of the holdings in them, particularly the industrial fund, is that the names of quite a few of the stocks are very similar. For example China Shipping Development and China Shipping Container, or China Railway Construction and China Railway Group. Spelled all the way out, yeah, you can tell the difference, but unfortunately many stock market websites -- Yahoo Finance is very guilty of this -- abbreviate the names of these companies such that you cannot tell the difference, making it very easy to end up with the wrong stock in your account.

One last point about these: They offer new choices for China, but new choices does not equate to more exposure. If you think one of these funds is the best way to go then you should buy that fund, but that does not mean you should double up your exposure.

The other thing I wanted to mention was that the crew over at Bespoke Investment Group cranked up the golly-gee-whiz machine to dig up decade to date returns for many world markets. If you bought Ukraine Gas & Electric, iShares Bangladesh or Romanian Bell at the start of the decade and held on you are probably pretty happy.

In all seriousness (hopefully, it is obvious I made those three names up) Ukraine was number one with a 1445% gain, Romania number two at 924% and third was Venezuela with an 893% gain. Bespoke found 39 markets with gains of greater than 100% for the decade. The US was near the bottom with a 24% decline and Japan was much worse with a 49% decline for the decade.

Shockingly, I say shockingly, Paraguay was not on the list.