Guggenheim China Small Cap ETF (HAO)
|HAO At A Glance|
|Largest Holding||China Shanshui Cement Group**|
|# Of Holdings||200**|
|2010 Gain (Loss):||15.85%|
|2009 Gain (Loss):||96.55%|
|2008 Gain (Loss):||n/a|
|*As of 7/22/2011. **As of 7/6/2011|
HAO offers China exposure that differs considerably from many of the other options in the China Equities ETFdb Category. There are several meaningful differences between this ETF and those that offer exposure primarily to large cap stocks; HAO will generally feature a unique sector profile, and has historically exhibited returns and volatility that vary widely from large cap-heavy ETFs. Investors looking to construct well rounded China exposure may find HAO to be tremendously useful, tapping into a corner of the Chinese stock market that most China ETFs overlook completely.
Under The Hood
HAO seeks to replicate the AlphaShares China Small Cap Index, a benchmark that includes about 200 small cap Chinese stocks. The components of HAO are likely unknown to most investors; this ETF doesn’t include huge financial institutions or oil companies, but rather smaller companies that may offer up more of a “pure play” on the Chinese economy.
There are several aspects to consider when comparing large cap and small cap Chinese stocks. Whereas large cap stocks may generate revenue regionally or even globally, small caps are more likely to depend on local consumption, potentially strengthening their relationship to the Chinese economy. Small cap ETFs can get investors “closer to the ground,” a position that may be advantageous for those looking to add long-term China exposure.
Small caps may also maintain a unique sector profile, offering heavier exposure to sectors underrepresented in large caps and (potentially enhancing the appeal as a complementary holding). Indeed, HAO maintains a sector mix that varies considerably from large cap ETFs. Financials, which make up the largest allocation in many China ETFs, receive only a very minor allocation in HAO. Consumer stocks receive a big weighting, perhaps helping to offset one of the biases found in ETFs such as FXI.
Banks and oil companies, two sectors that often receive huge allocations in international ETFs, make up only about 2% of HAO’s portfolio. Finally, small caps will be less likely to include state owned companies, potentially helping to avoid an additional risk factor found in large cap China ETFs.
The balance of exposure offered by HAO is impressive; company-specific risk is minimal in this ETF, with the top ten holdings combining to make up less than 15% of the total portfolio. That stands in stark contrast to many of the large cap-focused China ETFs that rely on a small handful of securities for the majority of the portfolio.
Expenses are one potential downside, though the additional fees aren’t overwhelming and HAO is in fact cheaper than some other larger and more popular China ETFs. It should also be noted that the name of this ETF is perhaps slightly misleading; the portfolio of HAO is actually dominated by mid cap stocks (though the lack of overlap with most other large cap ETFs is not compromised).
Investors may also want to consider ECNS as another option for small cap China exposure; the iShares fund has a lower expense ratio (0.65%), an even deeper portfolio (more than 350 individual components), and generally similar sector profile.
Small cap exposure should be a part of any complete China strategy, and HAO is a nice way to achieve access to this asset sub-class. This ETF can be used as a complement to the large cap exposure offered by funds such as FXI and GXC, helping to round out a China profile. But note that ECNS compares very favorable in many important metrics; the iShares small cap ETF may have the advantage over HAO.