ETFs to Play China’s Domestic Rebound

January 14th at 6:00am by Tom Lydon

An uptick in domestic demand and a resurgence of Chinese-listed A-shares has put China’s growth back in the spotlight. Exchange traded funds are a great way to gain targeted or broad-based exposure to China.

“Indeed, the evidence is pointing to a winning hand for investors in Chinese equities. Not only is GDP finally trending upward, but leaders have more boldly expressed a willingness to employ monetary/fiscal stimulus to support a 7.5% growth rate. (They’re likely to see north of 8% without stimulative measures.) And with a variety of benchmark indexes offering forward P/Es of 9 to 10, stocks tied to China look better than they have in years,” Gary Gordon wrote for Seeking Alpha.

The Chinese government’s new 5-year plan highlights a focus on increasing domestic demand in China so that the country will not rely so much on the export market. For this reason, analysts say the consumer space looks attractive. Furthermore, A-shares targeted on mainland China have gained momentum since the Shanghai Composite Index hit a four-year low last month, reports Dennis Hudachek for Index Universe.

The largest China-focused ETFs, the iShares FTSE China 25 Index Fund (NYSEArca: FXI) gives zero exposure to the consumer sector while the SPDR S&P China ETF (NYSEArca: GXC) gives about 11% to this area of the Chinese market. [China Data Strengthens - Time to Get Back into ETFs?]

Gary Gordon points out that the volatility that Chinese stocks have displayed are a result of following the growth rate of the economy too closely, rather than following the direction, or trend, of economic activity. [The Case for China ETFs]

Investors who want more exposure to small-cap growth will find that the consumer-fed, non-state-owned companies offer potential that mega-caps do not. The Global X China Consumer ETF (NYSEArca: CHIQ) targets small-cap stocks from the consumer cyclical and non-cyclical sectors. The Guggenheim China Small-Cap ETF (NYSEArca: HAO) holds about 200 mid and small-caps but gives limited consumer sector exposure. [ETFs That Focus on Emerging Market Consumers]

For Chinese A-share exposure, there is one ETF trading that gives U.S. investors easy exposure. The Market Vectors China ETF (NYSEArca: PEK) tracks the CSI 300 Index via swap agreements with Credit Suisse. Although PEK does not yet physically hold A-shares, the swaps are a stand-in, however, PEK is trading at a premium to net asset value. When demand for A-shares rises, the costs of swaps increase. PEK is anticipated to to hold physical A-shares sometime this year. [A Look at the Top ETFs of 2012]

Global X China Consumer ETF PEK, CHIQ, HAO, FXI, GXC, Small-Cap, China, Global ETFs

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.