What’s Fueling The China Energy ETF (CHIE)?

by on July 20, 2010 | ETFs Mentioned:

In the not-so-distant future, China will officially pass Japan to become the world’s second largest economy (if it hasn’t already). A few years after claiming that spot, the country will likely overtake the U.S. as the largest economy in the world, completing its meteoric rise from a predominantly rural third world nation to a driver of global GDP growth and economic powerhouse.

That rise, apparently, has required quite a bit of energy. The U.S. got a preview of its dwindling importance to the global economy this week, as the International Energy Agency announced that for the first time since the early 1900s, a nation outside of North America was the world’s biggest energy user. According to the IEA, China used 2,252 million tons of oil equivalent last year, about 4% more than the U.S. The “oil equivalent” metric covers all forms of energy, including coal, crude oil, nuclear, natural gas, and renewable hydrocarbons.

“The figures reflect, in part, how the global recession hit the U.S. more severely than China and hurt U.S. industrial activity and energy use,” writes Spencer Swartz. “Highlighting how quickly its energy demand has increased, China’s total energy consumption was just half the size of the U.S. 10 years ago.”

China’s insatiable raw material appetite has rippled throughout the global economy. The country was once a major exporter of oil and coal. Now it imports massive quantities of energy commodities from South America, Africa, the Middle East, and Australia; in fueling its own economic expansion, China has also fueled a global resource boom.

The demand for energy has also pushed Chinese companies to grow beyond their own borders. State owned energy giant Cnooc’s attempt to take over U.S.-based Unocal memorably failed in 2005, but Chinese companies have had their fair share of successes in the M&A market as well. China’s oil industry has been particularly active in recent years, taking advantage of the best buyers’ market in recent memory to snatch up companies, wells, and oil fields at bargain basement prices.

Where From Here?

The remarkable aspect of the growth in China’s energy use is, of course, that there is no end in sight. Though the rate of urbanization may slow and low-paying factory jobs have already begun to move overseas, there is tremendous potential for the country’s energy market; the average American consumes five times as much energy as the average Chinese citizen [see all ETFs in the Energy Equities ETFdb Category].

China’s economy is expanding at an impressive rate, while many analysts believe that U.S. oil demand has peaked, with alternative sources of fuel expected to gradually gain market share going forward.

China Energy ETF (CHIE) In Focus

Energy exposure is a major component of most ETFs found in the China Equities ETFdb Category; as in most emerging markets, oil firms and banks are among the biggest companies in China, and therefore account for the most significant allocations in cap-weighted indexes [see the database of ETF indexes]. There’s also one ETF offering pure play exposure to China’s energy sector: the Global X China Energy ETF (CHIE) provides an efficient way for U.S. investors to bet on China’s energy sector.

CHIE tracks the performance of the S-BOX China Energy Index, a benchmark made up of companies that have their main business operations in the energy sector and are domiciled in China or have their primary operations there. Traditional energy sources–oil and gas and coal–make up the majority of CHIE’s assets, but the fund also offers considerable exposure to a corner of the market that is expected to expand rapidly in coming years: alternative energy.

As cash-strapped government across Europe have pushed through harsh austerity measures, many have already scaled back or cut altogether subsidies to the alternative energy industries. The disappearance of financial incentives has hammered the still-developing industry, and it has also created an opportunity for China. Beijing has begun offering lucrative incentives to alternative energy firms, luring many of them from the European wastelands to the greener pastures of China [see Why Clean Energy ETFs Are No Slam Dunk].

In total, CHIE invests in about 25 securities; the fund charges an expense ratio of 0.65%.

Disclosure: No positions at time of writing.