Analyst Picks: Our Favorite China ETF Strategies

Published on by on August 18, 2011

As the previous pages have highlighted, different China ETFs will be appropriate for different investors; no two funds have identical risk/return profiles, and in most instances establishing well-rounded exposure will require multiple products.

Below, each of the ETFdb Analysts highlights their favorite China ETF strategy, highlighting the funds they would focus on if constructing a long-term, buy-and-hold portfolio:

Michael Johnston, Senior ETF Analyst

I’m a firm believer that no one ETF offers complete, optimal China exposure; I’d prefer to access this market through a combination of a large cap and small cap ETF, perhaps even with an additional tilt towards the consumer sector added through CHIQ.

My China strategy starts with the broad-based YAO, providing relatively well balanced exposure to large cap stocks. To complement the financials-heavy exposure and the dominance of large companies in that portfolio, I also recommend the extremely deep and very cost-efficient ECNS. Splitting exposure between these ETFs results in a portfolio that includes more than 500 stocks—or more than 20 times the depth of FXI. For those with a bullish outlook on the consumer sector—the demographic trends are too strong to ignore—sprinkling in some CHIQ exposure can be the final piece to the puzzle.

A China ETF profile that includes 45% YAO, 45% ECNS and 10% CHIQ is a strategy that should appeal to those in it for the long run.

Eric Dutram, ETF Analyst

My China strategy consists of a heavy allocation to the often overlooked PGJ which consists of roughly 225 companies that are traded in the U.S. but do a majority of their business in China. I like this fund more than some of the others in the space for large cap exposure because the product is underweight financials and is more heavily focused on tech, energy, and communication services, three sectors that could benefit from continued growth in the Chinese economy and are not facing the same bubble concerns as some of the banks are.

In order to compliment this exposure on the small cap side, I would pair PGJ with ECNS in order to help round out the portfolio from a market cap perspective. I like this fund more than HAO because not only is it cheaper, but it is more targeted on small caps than its Guggenheim counterpart.

While these two funds would make a great start for China investing, I believe that a truly well-rounded China portfolio would not be complete without small allocations to two funds; CHIQ and CHXX. These two products, which focus on the consumer and infrastructure sectors, respectively, are targeted plays on two corners of the Chinese economy that look to do the best over the long term, in my opinion. Plus, they receive minimal allocations in many other products, something that can be rectified by buying these two smaller products.

A China ETF profile that includes 50% PGJ, 30% ECNS, and 10% each in CHIQ and CHXX is a strategy that should appeal to those in it for the long run.

Stoyan Bojinov, ETF Analyst

When it comes to short-term tactical exposure it’s hard for me not to like FXI, as the fund offers unparalleled liquidity and has by far the most active options market out of all available China funds.

From a long-term perspective however, FXI has far too many flaws to be included as a core holding in a “buy-and-hold” portfolio.

My China strategy consists of heavy allocation to GXC which provides cheap exposure to mainly large-cap equities, allowing for broad diversification without taking on excessive risk. My other core holding is PEK, which gives investors access to the A-Shares market, and while this fund has a high risk/reward profile, I believe it’s essential for a truly well-rounded portfolio. Exposure to small-cap equities is also crucial and ECNS is easily the best option available, surpassing its competitors in terms of diversification and cost efficiency. Lastly, increasing levels of urbanization coupled with rising disposable incomes makes it hard to ignore the Chinese consumer base, which makes CHIQ a necessary complimentary holding.

A China ETF profile that includes 40% GXC, 30% PEK, 20% ECNS and 10% CHIQ is a strategy that should appeal to those in it for the long run.

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