PowerShares Golden Dragon Halter USX China Portfolio (PGJ)
|PGJ At A Glance|
|Largest Holding||Baidu, Inc.**|
|# Of Holdings||225**|
|2010 Gain (Loss):||11.31%|
|2009 Gain (Loss):||63.14%|
|2008 Gain (Loss):||-56.13%|
|*As of 7/22/2011. **As of 7/6/2011|
This ETF takes a unique approach to offering investors exposure to China’s stock market. Whereas most China ETFs invest in securities listed on stock exchanges in Hong Kong, PGJ’s holdings are listed on U.S. exchanges. So while they generate the majority of their revenues from operations in China, they are listed alongside U.S.-based companies and subject to some oversight by U.S. regulators.
Under The Hood
Though PGJ’s holdings are all U.S.-listed stocks, this ETF is able to effectively offer exposure to the Chinese market because the components generate the majority of their revenues and earnings in that market.
Besides the obvious difference in the nature of the component securities, PGJ stands apart from most China ETFs in other ways as well. Because the fund invests only in stocks listed in the U.S., it may not include some of the components found in products such as FXI or GXC; China Construction Bank, which makes up almost 10% of FXI, is nowhere to be found in PGJ.
The overall sector allocation is vastly different from many other China ETFs, which have a tendency to be tilted very heavily towards financials. PGJ makes only a minor weighting to this sector, and in fact maintains a relatively balanced portfolio from a sector perspective.
PGJ’s portfolio is impressive in both the depth and balance of holdings. In addition to the sector diversification mentioned above, PGJ holds more than 200 individual securities—considerably more than most other China ETFs. Further, the portfolio is spread across companies of all sizes; whereas most China ETFs are dominated by mega cap stocks, PGJ includes meaningful allocations to mid caps and small caps as well. For investors looking to access stocks of all sizes, PGJ will likely be preferable even to the Guggenheim China All Cap ETF (YAO)
Because the underlying securities are listed on U.S. exchanges, they may offer more transparency that stocks listed in overseas markets that may maintain less developed regulatory mechanisms. Moreover, the greater overlap of trading hours between the underlying securities and the actual ETF may eliminate some potential sources of confusion that may diminish the liquidity of international equity funds at certain hours.
Though the underlying securities have strong ties to the Chinese market, some investors may prefer to purchase A-Shares (through PEK) or stocks listed in Honk Kong.
Expenses are another potential drawback; PGJ isn’t the most expensive China ETF, but is towards the higher end of the spectrum, Considering that the underlying securities are all U.S.-listed stocks, it seems as if the fees could be a bit lower.
As mentioned above, PGJ casts a wide net by offering exposure to more than 200 individual stocks across a number of market sectors. While the exposure is deep, it is also top-heavy; the ten biggest names make up roughly half the portfolio. That extreme concentration is relatively common among China ETFs; small cap funds such as ECNS or HAO are the only real options for avoiding a top-heavy fund.
PGJ gives a unique take on China exposure, and should have obvious appeal for those looking to avoid stocks listed in international markets while still tapping into China’s growth potential. Beyond that nuance, PGJ could be appealing for other reasons; the portfolio is perhaps the most balanced in terms of size in the China ETF universe, and the sector allocation is relatively even (especially compared to products such as FXI). If only PGJ were a bit cheaper, we’d be singing the praises of this fund a bit more loudly.