Guggenheim China All Cap ETF (YAO)
|YAO At A Glance|
|Largest Holding||Baidu, Inc**|
|# Of Holdings||193**|
|2010 Gain (Loss):||8.81%|
|2009 Gain (Loss):||n/a|
|2008 Gain (Loss):||n/a|
|*As of 7/22/2011. **As of 7/6/2011|
YAO is designed to give investors broad-based exposure to Chinese equities, and has many advantages over larger and more frequently traded funds like FXI or GXC. This ETF has the potential to serve as a core holding in a comprehensive approach to China exposure, though a close look under the hood reveals some potential areas of concern.
Under The Hood
YAO’s portfolio consists of just under 200 holdings in total, providing a depth of exposure that most China ETFs can’t match. For example FXI, the most liquid China ETF available, has only 25 individual holdings. YAO also maintains a broader sector representation than many other China ETFs, making this fund an appealing option for those looking to overweight China in a long-term portfolio.
Some elements of the underlying portfolio may be less than optimal; there is a fair amount of concentration among the largest components of the index; ten stocks account for about 45% of total assets, resulting in a top-heavy design which increases company-specific risk. Though YAO is deep, it isn’t necessarily well balanced.
In terms of allocations by sector, YAO is heavily tilted towards financial service companies, dedicating close to 30% of total assets in Chinese banks alone. Technology, energy, and the basic materials sectors also receive adequate allocations, while health care and utilities holdings are neglected. The fund doesn’t offer much exposure to the consumer goods sector, which is a big setback since this is a critical component to any long-term China strategy.
Finally, it should be noted that YAO’s “All-Cap” title is perhaps a bit deceiving, seeing as the fund consists primarily of mega cap and large cap companies. The link to a cap-weighted index results in minimal weightings to the small cap corner of the market. That isn’t necessarily a negative, as large cap Chinese stocks have performed quite well historically and may offer a way to invest in the Chinese economy without taking on excessive risk. But large cap-heavy portfolios may bring certain biases, and might offer less of a “pure play” on the local economy compared to small cap equities.
YAO can serve as an essential core holding in many portfolios given the fund’s broad exposure. This ETF is top-heavy much like FXI, however YAO spreads exposure across a greater number of companies since it has a greater number of holdings with a smaller percentage allocated to the top ten companies. It is also worth noting that YAO is cheaper than FXI, another point in favor of this fund for those trying to decide between the few.
Besides some of the sector biases highlighted previously, there isn’t a whole lot to dislike about YAO; the portfolio may not offer a one stop shop for China exposure, but the depth of holdings gives investors a much broader exposure than many of the available alternatives.
One item of note is the relative liquidity; investors shouldn’t hesitate to trade YAO (or any ETF for that matter) based on the low ADV, but would be wise to use limit orders. It should also be noted that while YAO is optionable, the market for those securities isn’t nearly as liquid as FXI.
For investors looking to achieve exposure to China for the long haul, we like YAO as one part of a more comprehensive approach. This ETF offers a broad-based portfolio with fairly solid sector diversification that should be appealing to anyone considering the addition of China exposure to their portfolios. Investors should consider complementing YAO with a small cap-focused ETF such as HAO or ECNS to achieve well-rounded China exposure.