Try Small Cap ETFs to Gain from Chinese Domestic Demand - ETF News And Commentary

By Zacks | December 28, 2012 AAA

The Chinese economy slowed down in 2012 in the wake of a global economic crisis. S than expected recovery in the U.S. and the Euro-zone crisis impacted the Chinese exports. Additionally, a lower GDP growth rate and a higher inflation level added to China's economic woes. (Is This the Start of China's Hard Landing?)                                                                                     Thanks to the government stimulus and other reforms that supported the  domestic consumption, China could at the end avoid a hard landing. China is attracting investor attention once more on the back of a rebounding economy. After seven straight quarters of disappointment,  the GDP growth rate climbed recently and is expected to end the year at 7.5% or more.

With weak exports, China's focus has shifted to self sustaining growth through domestic consumption. To bring a transformation in economic development, which is more dependent on exports, the country is looking to give its domestic demand a shot in the arm. (Do ETFs Suggest that the China Panic is Over?)

The Chinese economy has seen a radical change in its growth pattern in which consumption now plays a vital role in GDP growth replacing investment which was once the biggest contributor. When it comes to China ETF investing, most investors look for the largest China ETFs like iShares FTSE China 25 Index Fund (FXI) (Forget FXI: Try These Three China ETFs Instead). But with China shifting its importance to domestic demand for economic growth, investors may opt to look for other options.

Investors looking to capture this shift in an ETF form can look to invest in small cap ETFs of China. Below we have briefly highlighted three small cap ETFs of China, namely, HAO, ECNS and EWHS.

Guggenhiem China Small Cap ETF (HAO)

To gain access to smaller and faster growing companies of China, investors can look to invest in Guggenhiem China Small Cap ETF (HAO). This fund specifically provides exposure to sectors that benefit from growth in domestic consumption. (China Small Cap ETFs Holding Their Ground)

The fund provides exposure to a large basket of 226 small cap stocks of China and has a diversified approach to investment as just 10.5% of the asset base is invested in the top ten holdings.

Regional allocation has the highest weighting with 71.1% asset investment in China. Hong Kong also gets a double-digit allocation. Singapore gets a very small portion of the asset base.

Among sectors, Industrials, Financials, Consumer Discretionary and Materials play a dominant role in the fund's performance. The fund charges a fee of 70 basis points annually.

iShares MSCI China Small Cap Index Fund (ECNS)

For a broader play in the small cap ETF space, iShares MSCI China Small Cap Index Fund (ECNS) makes a good choice. ECNS is home to 338 small cap stocks and manages an asset base of $17.6 million. (China Small Cap ETFs Head-to-Head: HAO vs. ECNS)

ECNS provides a very spread out exposure in terms of both individual and sector holdings. The fund has just 12.7% of asset base invested in the top ten holdings. For sector holdings, the highest weighting goes towards Industrials and Consumer Discretionary stocks while Financials, Materials and Information Technology stocks also get double-digit allocation in the fund.

The fund charges a fee of 59 basis points annually and has generated a yield of 2.25% in the process.

iShares MSCI Hong Kong Small Cap Index (EWHS)

EWHS tracks the MSCI Hong Kong Small Cap Index. The index measures the performance of the bottom 15% companies in terms of market capitalization in the Hong Kong equity market. (Hong Kong ETF Investing 101)

EWHS is home to 80 stocks and is highly concentrated in the top ten holdings. More than 50% of the asset base is allocated to the top 10. In terms of sector holdings, it is largely dependent on the Consumer Discretionary sector, with more than 40% of the pie. Financials, Information Technology and Industrials are some of the other sectors with double-digit allocation.

The fund charges a fee of 59 basis points and has delivered a return of 13.85% since its inception in January.

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