A Better Way To Play China With ETFs

china dragonWhile there has been some encouraging trade data lately from China, the overall sentiment regarding the nation remains quite bearish. Growth levels have slowed down, debt is a concern, and there is still plenty of speculation over the nation’s ability to rebalance its economy more evenly.

Thanks to these worries, a number of the most popular ways for U.S. investors to obtain China exposure in ETF form have been terrible picks so far in 2013. All three of the most popular China ETFs by assets under management—(FXI), (MCHI), and (GXC)—are all down on the year, while the leader, FXI, has declined by more than 10% in the time frame, giving many China ETF investors a very bearish viewpoint regarding the nation.

Better Picks?

However, it is important to note that the trio of most popular China ETFs are all heavily dependent on the financial sector to power their returns. Each of the three funds allocates at least 25% to the financial sector (FXI puts close to half its portfolio in financials), and the banking segment has been among the biggest laggards in China this year (see The Right and Wrong Ways to Invest in China ETFs).

This is largely due to concerns over huge debt levels in many parts of the Chinese economy, and spiking interbank rates earlier in the year. These factors, as well as concerns over the government’s plans to defend the sector, have made many investors give up on the space, pushing the sector sharply lower this year.

Not all China ETFs are so dependent on the sector though, as there are a number that are heavy in a booming corner of the Chinese market, technology. This segment of the Chinese investment world has been a star performer to start the year, and has been pretty much immune to the woes that are afflicting the financial space. Due to this, China ETFs that are more focused on the high tech industry could be better choices going forward.

For investors seeking plays in this segment, there are several, including two ultra-focused ETFs; (CQQQ) and (QQQC). Both of these zero in on technology stocks from the nation, and have added close to 30% so far in 2013 (also read KraneShares Launches China Internet ETF).

Still it is worth noting that both have low volume and assets under management, so bid ask spreads might be a bit wide. There is another, more popular option though, the PowerShares Golden Dragon China Portfolio (PGJ).

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