As the one of main catalysts for the global economy going forward, China has surged over the previous few decades. During the last 25 years, China has adopted and developed a free market economy, moved from a collectivized agriculture society and opened itself up to foreign investors and trade. China has 20% of the world population and will eventually surpass the United States as the world's largest economy. This should be an area you look at to diversify your portfolio. (Find our how countries like China used private enterprise to shift their economies in our article State-Run Economies: From Public to Private.)

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During the current global slowdown, while most central banks are predicting pitiful or negative economic growth, China is expected to rally between 6.5% and 8%. Yet China and its growth remain absent from many investors' portfolios. The average portfolio has less than 2% of direct money devoted to the populous nation and most have zero. This is an easy fix given the number of choices available with exchange-traded funds (ETFs).

Moving Beyond the FXI
Majority of the invested money in China sits in the $9.7 billion iShares FTSE/Xinhua China 25 Index (NYSE: FXI). However, the fund, albeit popular, has some major flaws. The first flaw is the fund's narrow scope; at only 25 total holdings, the index is a poor representation of the total number of Chinese firms available for investment. The fund then concentrates these holdings, with nearly 52% of them located in the financial sector. The major criticism of the ETF is that almost all the holdings are considered state-owned enterprises (SOE). For investors wanting to gain China exposure, there are better options for your investment dollar.

Broad-Based Funds
With 120 total holdings, the PowerShares Golden Dragon Halter USX China (AMEX: PGJ) is the broadest fund. While there are allocations to the state enterprises, the ETF is fairly balanced. The largest weighting is towards information technology at 22%. Financials clock in at just fewer than 7%. The index that the ETF tracks is also unique. The Halter USX China is comprised of the U.S.-listed securities of companies that derive a majority of their revenue from the People's Republic of China. Investors gain the safety of U.S.-listed companies, while still maintaining the benefits of being invested in China. The fund charges 0.70% in expenses.

There is plenty of academic research showing that small and mid caps outperform large-cap stocks over long periods of time. In addition, the growth of China's economy will come from the new entrepreneurialism that is sweeping the nation. To that end, the Claymore/AlphaShares China Small Cap (NYSE: HAO) should be winner. The fund contains 134 small- and mid-cap holdings and has performed impressively, returning over 50% year-to-date. By focusing on the smallest, fastest growing Chinese companies, investors can take advantage of the economic expansion from a ground-up approach.

Alternative Choices
While the world's real estate markets have been in a quandary other the past few years, in the long term it still remains a valuable asset class. With the adoption of the REIT tax structure becoming a worldwide standard, investors now have the opportunity to invest in the world of real estate markets. Another fund by Claymore, the Claymore/AlphaShares China Real Estate (AMEX: TAO) allows investors a chance to participate in China's growing real estate market.

Another interesting way to play China is through its currency. The Wisdom Tree Dreyfus Chinese Yuan (AMEX: CYB) allows investors to receive current income reflective of money market rates in China available to foreign investors. The fund has performed well, returning 4.07% since its inception in May of 2008, considering the broad market is down during that time frame. The fund currently pays a 1.9% distribution. Investing in currency has its own benefits aside from the China factor, (Please see Diversify with Currency for more)

Bottom Line
China is quickly becoming the world's number one economy, yet most portfolio's have far too little exposure to the Asian superpower. The proceeding ETFs offer a way for investors to participate in current and future growth. (Learn the differences between ETFs and mutual funds in our article Mutual Fund Or ETF: Which Is Right For You?)

L1) The Central Intelligence Agency's The World Fact Book as of April 23, 2009.

L2)http://www.claymore.com/etf/fund/tao?utm_source=ETF+Banner&utm_medium=web&utm_campaign=China

L3)http://www.claymore.com/etf/fund/hao?utm_source=ETF+Banner&utm_medium=web&utm_campaign=China

L4) http://www.claymore.com/etf/BRICwhitepaper.pdf

L5) http://us.ishares.com/product_info/fund/overview/FXI.htm?qt=FXI

L6) http://www.thestreet.com/story/10516142/2/play-china-with-this-small-cap-etf.html

L7) http://www.invescopowershares.com/products/overview.aspx?ticker=PGJ

L8) http://www.claymore.com/etf/fund/hao/performance

L9) http://www.wisdomtree.com/etfs/fund-details-currency.asp?etfid=64

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