4 China based ETFs

By Colin (Huaizhi) Chen

So you've been hanging around the investment circles for a long time. You look at your list of mutual funds knowing that she has carried you through a long financial relationship. Lately though, the seductive allure of those tickers have lost their luster. You have this craving in your bones for something exciting and different. You want to impress your buddies with a new investment vehicle, but you know better than to fool around with those European hedge funds (who knows what they have been involved with). You want the safety of your old managed mutual fund but loath her loading and high maintenance (costs). Well, my friend, let me introduce you to a little lady we call the Exchange Traded Fund.

Exchange Traded Funds (ETF) are funds designed to track the performance of a specific industry index. They can be traded over a regular market exchange like the traditional close ended mutual funds; but unlike those funds, ETFs have a few regulatory advantages from their creation and redemption structure. New shares of ETFs are created whenever an authorized participant deposits an index tracking portfolio of stocks into a separate trustee. These ETF shares can be bought, sold, or even shorted like any regular stock. Because they are based on trusteeships and are simply trackers of a specific stock index, ETFs avoid much of the management and tax costs associated with traditionally managed funds. In fact, because ETFs can be created and capitalized fairly easily, prices of ETFs float closely to their net asset value.

"So what? How does this help me with long term investment?" you ask. Exchange Traded Funds allow an effective method of diversification by tracking an industry index. As we have mentioned before, fund managers generally do not out perform the market. Considering that and the hefty one to two percent annual fee they charge off your entire investment, you might be better off firing that greedy know-it-all and putting your money into an ETF.

If you are indeed serious about a new vehicle that taps into the growth of China, consider these four ETF's traded on the New York Stock Exchange.

ISHARE MSCI Hong Kong (ticker- EWH): This is the oldest ETF focused on China. EWH tracks companies in the Hong Kong Stock Exchange. 32% of its holdings are in Real Estate Management, 13.5% in Commercial Banks, and 10.3% in Industrial Conglomerates. While they are companies based in Hong Kong, many of the companies focus on the Chinese domestic market.

ISHARES FTSE/Xinhua China 25 Index (ticker - FXI): As its name suggests, this ETF tracks the Xinhua China 25 Index, which is, itself, formed of the 25 largest Chinese stocks trading on the Hong Kong Stock Exchange. China Mobile, PetroChina, and China Life are some of the companies you will be buying with this ETF.

PowerShares Golden Dragon Halter USX China (Ticker - PGJ): This ETF contains only U.S. exchange listed companies that derive most of their revenue from China. Proponents of this ETF believe that because these companies are US listed, they are much more transparent and in turn, safer for investors.

SDPR S&P China (Ticker - GXC): This is another ETF based on the H and N shares. According to Malkiel's From Wall Street to Great Wall, it has close to 200 companies in its market-weighted index.



Now you have a collection of China focused ETFs. Due to their low cost and diversification, ETFs make attractive investment vehicles for your venture into the East. A note of caution however; while ETFs are diversified to avoid the volatilities of an individual stock, they are still no better in performance and risk than the indices they track. Considering the wild east attitude of the Chinese financial analysts, that might be reason enough to keep your options open.

- H