As ETFs have grown from a closet industry to a mainstream investing option, funds offering exposure to nearly every corner of the globe have popped up. Although the abundance of funds has brought access to dozens of equity markets within reach, the vast majority of international ETFs provide fairly shallow exposure to the country they purport to represent, tracking blue chip indexes composed of only a handful of mega-cap stocks (essentially the equivalent of the Dow Jones Industrial Average in the U.S). The iShares MSCI Spain Index Fund (EWP), for example, is based on an index that has only 31 holdings and an average market cap of more than $86 billion.
But as the “home country” begins to fade, U.S. investors are looking to allocate larger portions of their portfolios to international equities, and seeking out ways to gain both more broad-based exposure and target specific sectors. In response to this demand, several innovative ETF issuers have launched funds offering more targeted exposure to non-U.S. economies. One of the regions that has seen the most development is China.
With more than $10 billion in assets, the iShares FTSE/Xinhua China 25 Index Fund is by far the most popular China ETF. But in many ways FXI isn’t an ideal security for investors looking to gain exposure to the Chinese economy. The index underlying FXI is dominated by mega-cap companies, and is tilted heavily towards the financial sector, with relatively little weighting given to industrials and almost none to consumer products.
In early 2008, Claymore launched a China Small Cap ETF (HAO), a fund seeks to invest in smaller Chinese companies not included in most existing ETF products. This year, the company added an all cap China ETF (YAO) that spreads holdings across all sizes of companies. Now Claymore and New York-based Global X have introduced several sector-specific China ETFs, allowing investors to target various sectors of the Chinese economy. ETFdb Pro members can read more about China ETF options in our ETFdb Category Report (if you’re not a Pro subscriber yet, sign up for a free trial or read more here).
Exposure To: Internet companies, telecommunications firms, and software and hardware manufacturers.
Why This Sector Is Important: China is the world’s largest cell phone and internet market, with over 600 million cell phone users and 300 million internet users. But the penetration rate among internet users is still extremely low (around 25%), suggesting huge potential for growth in this market going forward. Moreover, $54 billion of China’s $585 billion stimulus package is allocated to technological advancements, and the country’s middle class is expected to grow significantly in coming years, suggesting that both product development activity and disposable income will surge.
ETF Options: Global X China Industrials ETF (CHII)
Exposure To: Industrial manufacturers, building materials firms, infrastructure groups, and shipping and logistics services companies.
Why This Sector Is Important: A significant portion of China’s $580 billion stimulus package is directed towards construction, railways, subways, and airports. In October of this year, China’s industrial output rose by more than 16% from a year earlier, and expansion in this sector is expected to continue to increase in coming years. Many economic forecasters anticipate that China will surpass the U.S. as the world’s largest manufacturer by 2015.
ETF Options: Global X China Consumer ETF (CHIQ)
Exposure To: Food & beverage companies, automobile manufacturers, department stores, sports apparel companies.
Why This Sector Is Important: If the industrial sector of the economy is the “China of Today,” the consumer sector is the “China of Tomorrow.” Consumer spending currently accounts for about 35% of China’s GDP, roughly half the level of the U.S. Chinese President Hu Jintao has said repeatedly that the government will focus on expanding domestic spending “especially consumer demand.” According to Morgan Stanley, “the incremental contribution of Chinese consumers in USD terms to the global consumption of tradable goods started to exceed that of the U.S. in 2007.”
ETF Options: Global X China Energy ETF (CHIE)
Why This Sector Is Important: In order to feed its growing economy, China must find new sources of power and provide massive amounts of energy to its citizens. In 2006, China added over 90 Gigawatts of coal power, the equivalent of all the coal power plants in Great Britain. Clearly one of the great challenges for modern China will be finding a way to provide adequate levels of power to its citizens ensuring that the energy sector will play an important role in China for decades to come.
ETF Options: Global X China Financials ETF (CHIX)
Why This Sector Is Important: In order to transition from a export based economy to a self sufficient one, China must develop its banking sector. With a national savings rate of over 31% there in an incredible amount of money that can be put to work by average Chinese citizens in Chinese banks. This influx could be used to invest in other sectors of the Chinese economy and help to raise living standards across the country and spur more business growth that is not dependent on the communist party for seed capital.
Sector Investing With Emerging Markets ETF
China isn’t the only corner of the world that offers U.S. investors the ability to target specific sectors of the broader economy. Emerging Global Advisors offers a line of sector-specific ETFs targeting the financial, metals and mining, and energy industries in emerging markets (many of which include big allocations to China). To see a breakdown of these ETFs and the exposure they offer, see this feature.
Disclosure: No positions at time of writing.