Take The All-Cap Route To China

By Will Ashworth | January 20, 2010 AAA

This past year was a good one for stock markets in Brazil, Russia, India and China, whose major indices rose 83%, 137%, 81% and 79% respectively, all superior to the 26.5% total return achieved by the S&P 500 in 2009. Granted, with this hyper-performance comes greater risk, but investors looking to add some zip to their otherwise mundane portfolios might consider putting 10-20% of the equity portion in BRIC-related investments. While many are hesitant to invest anywhere where the regulatory environment isn't completely open and transparent, American companies operating in these emerging markets and/or domestic businesses already operating there offer some interesting potential.

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Of particular interest is China, whose economy remains strong relative to the rest of the world. One exchange-traded fund that stands out is Claymore/AlphaShares China All-Cap ETF (NYSE:YAO), which replicates the AlphaShares All-Cap China Index. (This emerging market is making strides in regulation and disclosure. Read Investing In China.)

All Caps Make Sense
A truly diversified portfolio should contain a little of bit of the three major market caps: large, mid and small. While it might seem safer investing in just blue chip large cap stocks, in the end, the team concept usually wins long term.

Unlike its more established sister fund, the Claymore/AlphaShares Small Cap China Index ETF (NYSE:HAO), which invests exclusively in small cap stocks operating in China, the YAO is currently 47.1% invested in large caps, 35.9% in mid caps and the remaining 17% in small caps. A more equal weighting for all three market-caps might be nice to see but 17% small-cap representation is probably more than enough for most risk-averse investors.

Since the All-Cap fund's inception is October 19, 2009, its unit price is down 0.94% on an annualized basis while its net asset value is up 2.62%. The small cap fund does have more than a full-year of performance under its belt and the numbers were good. In terms of price, it gained 97.47% in 2009 and 102.06% in terms of net asset value. This is why a one-third split between the three market caps is preferred by many investors. When the small caps are booming, it takes the pressure off the large caps and vice versa.

Aren't Stocks Overheated?
Markets around the world did well last year. Commonsense does lead one to believe a repeat performance is highly unlikely. Furthermore, big China supporters like Jim Rogers are on record avoiding stocks and buying commodities. Certainly, investors need some self-control and that is why only 10-20% of your equity holdings should go into a fund like this.

On a $100,000 portfolio that is 60% invested in stocks and 40% in bonds, the All-Cap fund would at most represent 12% of your overall investments. That's not risky if your investment horizon is three to five years.

Furthermore, the All-Cap fund is 29% invested in the energy, materials and consumer staples sectors, which are all good commodity plays. Add to this the fact almost all of its top 10 holdings - which includes China Mobile (NYSE:CHL), PetroChina Company (NYSE:PTR) and China Life Insurance (NYSE:LFC) - have ADRs traded on the New York Stock Exchange, it stands to reason that if you believe in China's growth you shouldn't have a problem owning this exchange-traded fund.

The Bottom Line
If you're looking for a simple, inexpensive route to Chinese investments, there aren't many better than the Claymore/AlphaShares All-Cap China ETF. (To learn more about investing in China, read Top 6 Factors That Drive Investment In China.)

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