Small-Cap China ETFs

Chinese stocks have been relatively weak over much of 2012, but stronger economic data in the fourth quarter has helped lift China’s markets. While investors can pick through a number of country-specific exchange traded funds, small-cap ETFs provide a greater focus on China’s domestic growth story, going into 2013.

“We think Chinese equities may have a place within a diversified portfolio, given China’s standing as the second-largest economy in the world, whose growth will likely outpace that of the developed world in the near and medium term,” according to Morningstar analyst Patricia Oey. [China ETFs March Higher on Manufacturing, Economic Strength]

Most investors tend to focus on the largest China-related ETF, iShares FTSE China 25 Index Fund (NYSEArca: FXI), which tracks the 25 of the largest Chinese companies available to foreign investors. The ETF has a heavy allocation to financials at 59%, followed by telecom services 15.7% and oil & gas 14.7%. The fund is up 15.7% year-to-date.

Beijing wants to shift its strategy away from exports and more on domestic demand, boosting imports and increasing the integration of rural migrants to cities as a way to raise domestic consumption, the Wall Street Journal reports. [ETFs to Access China’s New Growth Phase]

Consequently, investors may consider small-cap Chinese equities as a way to capture the shift inwards.

For instance, Guggenhiem China Small Cap ETF (NYSEArca: HAO) follows the AlphaShares China Small-Cap Index. The ETF’s top holdings include industrials 24.4%, financials 18.7%, consumer discretionary 14.4%, materials 13.1% and consumer staples 9.6%. HAO is up 16.3% year-to-date.