Investing In China's Growth Through ETFs

By Matthew McCall | February 02, 2012 AAA

During the fourth quarter of 2011, the GDP growth in China came in at 8.9 %, one of the best in the world. Most countries would do whatever it takes to get close to the number China is boasting. However, for China, the number is looked at as a slight disappointment because it was the slowest pace of growth in ten quarters.

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For the year, China reported growth of 9.2% versus 10.4% in 2010, again showing slowing growth for the Asian country. The growth forecast for 2012 remains mixed, but for the most part they are close to the 9.2% that China achieved in 2011.

Some may view the slowing in China as the bursting of the bubble and the end of the decade-long bull market. However, I believe that any growth above 8% reflects a soft landing and it will present a buying opportunity for beaten-down Chinese investments. (For related reading, see Investing In China.)

Chinese ETFs
The widely held iShares FTSE China 25 Index (ARCA:FXI) had a rough 2011, falling over 20% and moving into bear market territory. The weak number comes after a strong fourth quarter for Chinese stocks, as money started to flow back into risky assets around the globe.

In the last week, FXI has moved to a new five-month high, even as the growth numbers showed progress slowing. Shares in Chinese stocks can be viewed as both value and growth assets. The 26 stocks that make up FXI are heavily weighted in the financials (about 54%) and it has a P/E ratio of roughly 11.8. The expense ratio is 0.72% and it has a 30-day SEC yield of nearly 2.6%.

While FXI concentrates on the largest and most liquid Chinese companies that are available to outside investors, the iShares FTSE China (Nasdaq:FCHI) tracks both large and mid cap stocks available to outside investors. FCHI is made up of 116 stocks that are also heavily invested in the financial sector (about 44%). The performances of the two ETFs are almost identical in 2011, with both down around 20%. The expense ratio is 0.72% and the 30-day SEC yield is almost 2.7%. (For additional reading, see the Advantages And Disadvantages Of ETFs.)

Underperforming the two iShares China ETFs was the Market Vectors China ETF (ARCA:PEK). This ETF differs greatly because it tracks an index of 300 A-share stocks that are traded on the Shenzen or Shanghai Stock Exchanges. These are shares not accessible by the typical foreign investors, therefore PEK uses swaps and derivatives to replicate the index. The ETF charges a net expense ratio of 0.72% and is heavily invested in the financial sector (about 35%).

There are now a handful of Chinese sector ETFs that allow investors exposure to specific areas within the Chinese economy. One that is interesting is the Global X China Consumer ETF (ARCA:CHIQ) that invests in a basket of 40 stocks that seek to track the consumer goods sector in the country. The two largest sectors represented are retail and consumer services, and the expense ratio is 0.65%. In 2011, the ETF lost over 24%.

The Bottom Line
Based on the underperformance in 2011 and the still-robust growth, even though it is slowing, I feel there is opportunity in China. The selling that occurred last year priced in a hard landing and all data points that I've seen point to a soft landing. If I am correct, look for the basket of China-related ETFs. (To learn more, read The Benefits Of ETF Investing.)

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At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.

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