ETF Plays For China’s Internet Boom

by on September 8, 2009 | ETFs Mentioned:

There can be little debate that China’s economy has made tremendous progress over the last decade, implementing market reforms that have brought the world’s most populous nation closer to “developed” status. But there are many areas of China’s economy that remain far behind those of western Europe and the U.S. The slow development of China’s Internet industry is perhaps best evidenced by the struggles that Google has experienced in the country. “Google was going to help democratize data in China,” writes Tom Krazit. “Instead, about three years after entering the Middle Kingdom, the search company still finds itself in an uncomfortable working relationship with government censors.”

Google has butted heads with the Chinese government in recent years over a number of issues, mostly revolving around censorship. The government once blocked all web searches that could have related to Tienanmen Square, and on another occasion reprimanded the Mountain View, California company for the appearance of pornography in search results.

Google’s Chinese operations hit another major snag late last week when Kai-Fu Lee announced his departure from the search engine giant. Lee had become well known as one of the most prominent ethnic Chinese technology executives, and was responsible for overseeing Google’s operations in the country. But while Lee’s departure is obviously bad news for Google, it may be good news for China’s technology sector, particularly the Internet niche.

Will Innovation Work?

Lee is leaving Google to start a new “technology-incubation company” according to the Wall Street Journal. The new firm, called Innovation Works, will provide financial and technical support to entrepreneurs with technology start-ups focusing on China’s Internet industry. In a meeting with reporters on Monday, Lee indicated that his company hopes to create about 5 start-ups per year and retain an interest of up to 20% in each of them.

Lee’s new company has reportedly received backing from many prominent financiers and tech industry veterans, including Hon Hai Precision Industry Co., Legend Holdings Ltd., and Steve Chen. While Lee’s new company is relatively small (reportedly with total capital of around $115 million), many believe it is a strong indication that the next wave of growth in the Chinese economy will come from the technology sector.

There are several ways for U.S. investors to gain exposure to China through ETFs. But not all China ETFs are created equal. Some are weighted largely towards industrials, while others maintain heavy concentrations in the financial sector. Here’s a look at the weighting of several China ETFs towards major sectors of the economy (sign up for our Free ETF Newsletter for more coverage of Technology ETFs):

Ticker ETF Technology Industrial Financial
FXI iShares FTSE/Xinhua China 25 Index 0% 6% 50%
EWT iShares MSCI Taiwan Index Fund 58% 3% 16%
HAO Claymore/AlphaShares China Small Cap ETF 16% 22% 19%
PGJ PowerShares Golden Dragon Halter USX China Portfolio 22% 11% 7%
GXC SPDR S&P China ETF 9% 9% 33%

Several ETFs maintain significant allocations towards the technology sector of the Chinese economy, including:

  • Claymore/AlphaShares China Small Cap ETF (HAO): As its name indicates, HAO invests primarily in small cap Chinese equities, including a significant allocation towards the technology sector. HAO is perhaps the best diversified China ETF, offering exposure to nearly every corner of the economy. HAO is up more than 75% in 2009, making it one of the best-performing ETFs.

HAO

  • PowerShares Golden Dragon Halter USX China Portfolio (PGJ): PGJ also maintains a significant allocation to the technology sector, and allocates nearly 5% of its holdings to Baidu, a search engine company often referred to as the “Google of China.” PGJ has gained about 51% this year.

PGJ

  • iShares MSCI Taiwan Index Fund (EWT): EWT has the highest allocation to the technology sector of all China ETFs, with nearly 60% of its holdings in this industry. EWT has gained more than 50% in 2009.

EWT

Disclosure: No positions at time of writing.