China ETFs still offer potential profits
Here are top-performing picks for emerging-market investors.
By Jon Ogg
Exchange-traded funds in China offer great investment opportunities.
China's GDP may have slowed a bit, but it is still considered one of the top growth markets in the world -- and thus a great place for emerging-market investors. Things are good enough that debt ratings agencies are even considering raising the sovereign debt ratings of China at a time where it seems almost every other country is at risk of downgrades.
But when it comes to China investment, picking individual Chinese stocks is difficult for U.S. investors due to valuations and transparency concerns -- even if the IBD 100 is littered full of Chinese high-flyers each week. That leaves exchange-traded funds (ETFs) and exchange-traded notes (ETNs) as a top option outside mutual funds.
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Last week, InvestorPlace noted that the iShares FTSE/Xinhua China 25 Index Fund (FXI) may be the largest, but other China-ETF products had outperformed it or have had very impressive performance. The first outperforming China-oriented fund was the iShares MSCI Hong Kong Index Fund (EWH). The Claymore/AlphaShares China All-Cap ETF is now the Guggenheim China All-Cap ETF (YAO). Two more were SPDR S&P China ETF (GXC) and the iShares FTSE China (HK Listed) Index Fund (FCHI).
Many feel that China's decision to peg to the U.S. dollar has created a largely undervalued currency. In fact, we have yet to hear any pundits claim that the yuan would depreciate at all if China just walked in one day and pulled the plug on its yuan-dollar peg. A rising yuan/renminbi would first benefit the WisdomTree Dreyfus Chinese Yuan (CYB) with its 200,000 shares a day in volume, followed by the much less liquid Market Vectors Chinese Renminbi/USD ETN (CNY). These two were even noted as a play on quantitative easing. Unless a currency-peg is further loosened, these are likely to remain very low in trading volume due to the lack of volatility in each.
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There are often many ways to skin a cat, and that is now true of "Sector exchange traded funds" that trade around individual sectors in China. The old rule of thumb is that markets generally have to see a rise in financial stocks for a broad market to rally. One play on financials is Global X China Financials ETF (CHIX). And for tech, there is also the much thinner-volume Global X China Technology ETF (CHIB).
Many consider closed-end funds the 'old school' version of ETF's, but many are still active. The China Fund (CHN) is active with more than 200,000 shares traded a day and its market cap appears impressive at $771 million. It has been around since the early 1990's. Last weekend it was even listed as being at a 5.7% discount to its net asset value in the Barron's closed-end fund tables along with a 28.3% return over the last 12 months.
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In closed-end funds there is also the Templeton Dragon Fund (TDF). While less liquid with closer to 100,000 shares per day, it is listed as having a market cap north of $1.1 billion. It has also been around since the mid-1990's and is under the great emerging market investment manager Mark Mobius. Barron's closed-end fund tables last weekend listed the discount to net asset value as 8.1% and showed 12-month performance of 18.6%.
This list here is a small fraction of the China exchange traded funds out there. As noted, there are many ways to skin a cat. That is definitely true in ETFs and now you know it is true for exposure to China as well.
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These companies won't soar like other plays in the sector, but they make for great income sources.
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