Consider Alternative China ETF Strategies

china etfsDavid Fabian: Emerging markets have largely failed to keep pace with red hot U.S. stocks over the last year.  While most domestic equity indexes are notching double digit returns in 2013, large-cap stocks in China, Brazil, and India are still struggling in the red.  Much of this under performance can be blamed on slowing economic growth combined with currency devaluations that have dragged their markets lower.

China in particular has seen a slowdown in their financial and real estate sectors that has weighed on the widely held iShares China Large Cap ETF (NYSEARCA:FXI).  This fund has over 55% of its $5.7 billion in assets invested in companies that are tied to these sectors.  The overweight nature of this asset allocation has led to FXI posting a total return of -4.72% so far this year (through 10/8/13).   However, with so many ETF options available in the market today, there are several China alternatives that may prove worthy of your hard earned dollars.

Small Cap Stocks

One alternative China opportunity that has flown largely under the radar this year is the Guggenheim China Small Cap ETF (NYSEARCA:HAO). This fund is comprised of 251 small-cap stocks centered in China and Hong Kong with over $200 million in total assets.

For inclusion in the ETF, Guggenheim defines small capitalization companies as those with a maximum $1.5 billion market capitalization. The top three sectors include industrials, financials, and consumer discretionary stocks which together make up 49% of the ETFs underlying portfolio. In addition, the net expense ratio for HAO is 0.75% annually.

HAO is trading very near its 52-week highs and has been in a strong uptrend since its June lows.  Small cap stocks are an excellent way to get exposure to growing segments of the economy that are often overlooked because of their relative obscurity. Many people believe that the next phase of Chinas growth will be stimulated by local consumers instead of foreign exports which are what these small cap stocks are uniquely positioned to reach. In addition, with HAO you avoid many of the mega-cap China stocks that are dominated by state-run enterprises.


One of the best performing segments of the Chinese economy this year has been technology stocks.  The Guggenheim China Technology ETF (NYSEARCA:CQQQ) is comprised of a concentrated 39 companies in the information technology field.  The ETF only has $39 million in assets, but it has posted an impressive gain of over 48% so far in 2013.

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