Global X China Industrials ETF (CHII)
|CHII At A Glance|
|Largest Holding||Anhui Conch Cement Company**|
|# Of Holdings||40**|
|2010 Gain (Loss):||7.50%|
|2009 Gain (Loss):||n/a|
|2008 Gain (Loss):||n/a|
|*As of 7/22/2011. **As of 7/6/2011|
CHII is another hypertargeted fund from Global X that focuses its assets on the industrials sector of the Chinese economy. The investment thesis behind this product is relatively straightforward; as China continues to grow and develop, the industrial sector will see high demand in order to meet the needs of the citizens of the nation.
Under The Hood
CHII’s underlying index aims to invest in companies that do the majority of their business in the industrial segment of China. In total this ETF has 40 holdings, though like many sector-specific China ETFs the exposure offered is quite top-heavy. CHII allocates nearly 45% of its assets to the top ten holdings, meaning that a relatively small basket of stocks are responsible for a major portion of total returns.
While CHII is focused exclusively on the industrial sector, the fund is actually well balanced within this segment of the Chinese market; several different sub-sectors are represented in the underlying portfolio. CHII’s components include construction materials firms, electrical and marine equipment manufacturers, engineering firms, carmakers, mining companies, and road and rail stocks. That ensures a nice cross sector of the portion of the Chinese economy responsible for powering countless factories and supporting the rapid expansion of China’s massive urban areas.
Another noteworthy component of this ETF is that the majority of its holdings are large cap companies. While this may make for a safer investment, it can also negate some exposure to the particular sector as these major companies tend to do business all over the world rather than just inside the borders of China.
The biggest advantage CHII offers is its unique exposure that is met nowhere else in the ETF space. Investors looking who feel that the Chinese industrials sector presents strong growth opportunities, this product may be the perfect fit. And as mentioned above the underlying portfolio includes exposure to industrials stocks of all types, representing various sub-sectors of a critical segment of the Chinese market.
CHII charges a competitive expense ratio, allowing investors to invest in a very targeted, hard-to-reach sector, without losing gains to exorbitant fees. On top of this, CHII can be traded commission-free on Interactive Brokers, allowing investors to potentially buy and sell without incurring fees that can push up the total cost of an ETF investment dramatically.
On the negative side of things, the top-heavy nature of this fund will mean that one company can have a significant impact over the ETF’s performance, as CHII does not have the strongest diversity in the space.
Another problem with this product is its heavy allocation to large cap firms, which may diminish the long-term growth potential (as well as volatility) that smaller companies can bring to a portfolio.
One final issue that that CHII faces is its low volume and AUM. While trading volume generally isn’t indicative of the true liquidity that can be realized in an ETF, funds with smaller daily turnover are more likely to exhibit significant bid ask spreads. This is by no means a red flag, but rather an indication that market orders probably aren’t a good idea when trading CHII.
Although China’s economy continues to evolve rapidly, the industrials sector is still responsible for a significant portion of growth. For investors looking to tap into this corner of the market, CHII is the only pure play option on the market. CHII isn’t perfect, but offers relatively well balanced exposure.