Guggenheim China Technology ETF (CQQQ)

Published on by on August 18, 2011

CQQQ At A Glance
Issuer: Guggenheim
Structure: ETF
Expense Ratio: 0.72%*
Inception Date: 12/18/2009
Largest Holding Baidu, Inc.**
Weight: 10.8%**
# Of Holdings 40**
AUM: $37.74M*
ADV 32,489*
2010 Gain (Loss): 7.46%
2009 Gain (Loss): n/a
2008 Gain (Loss): n/a
*As of 7/22/2011. **As of 7/6/2011

This ETF offers targeted exposure to China’s tech sector, making CQQQ a potentially useful fund for those looking to place a bet on this corner of the Chinese stock market. But that isn’t the only possible use for CQQQ; this product has the potential to be employed in a number of different ways.

Under The Hood

CQQQ’s portfolio consists entirely of Chinese technology companies, giving very precise exposure to a segment of the country’s economy. Component companies include semiconductor manufacturers, search engine and Web-based firms, and manufacturers of computers and other gadgets.

Like many sector-specific international products, CQQQ is somewhat limited in depth. In total, this ETF holds about 40 different stocks, though just ten of those names account for about 60% of the portfolio. In other words, CQQQ is top-heavy; a few large companies account for the bulk of performance, resulting in meaningful company-specific risk. Search engine firm Baidu makes up more than 10% of assets, and several other firms account for 6% or more of the portfolio. So CQQQ doesn’t feature the same degree of diversification that more broadly-based ETFs can offer.

Pros

For investors seeking precise exposure to the Chinese tech sector, CQQQ is one of the only options on the market. And because tech stocks receive little or no weight in many of the “broad” China ETFs highlighted in the previous section of this report, this fund might be useful as a tool for rounding out exposure and establishing more complete exposure to the Chinese economy.

Compared to CHIB, this Guggenheim casts a slightly wider net, including about 40 stocks compared to 30 or so for the closest competitor.

Cons

There are a couple disadvantages of this product, including some unfavorable comparisons to the ETF from Global X that offers similar exposure. First, CHIB is cheaper by about seven basis points. That gap isn’t huge—and can easily be covered by minor outperformance—but should be noted for investors interested in minimizing bottom line expenses. Moreover, CHIB is eligible for commission free trading (though most investors do not use the Interactive Brokers platform), creating another potential cost disadvantage for this ETF.

As mentioned above, this ETF has more total holdings than CHIB. But while CQQQ may offer greater depth of exposure, the balance is less impressive. With ten stocks making up 60% of the portfolio, CQQQ is more top-heavy than the Global X counterpart.

Final Verdict

This ETF may be appealing in a number of different roles. We believe that the technology sector is strategically important for long-term China exposure, offering an opportunity to tap into a corner of the market that maintains tremendous potential. Yet many China ETFs give little weighting to tech stocks, and some overlook it entirely.

That makes CQQQ potentially useful as a tool for rounding out China exposure; this ETF can be used as a complement to other China funds for those looking to fine tune exposure. It obviously has appeal also as a tactical tool for making a targeted bet on China’s tech sector, and may also be useful as part of a long/short pairs trade (such as long CQQQ / short XLK).

Investors would be wise to compare this fund closely with CHIB; while they are generally similar in terms of the exposure offered, the profile offered by the Global X fund may be more attractive to those looking to minimize fees and maximize balance.

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