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.
“Relative to broad, cap-weighted funds, HAO provides better exposure to domestic growth trends,” Oey added.
The iShares MSCI China Small Cap Index Fund (NYSEArca: ECNS) tries to reflect the performance of the MSCI China Small-Cap Index, which holds the bottom 14% by market of the Chinese equities market. Top sectors include consumer discretionary 18.9%, industrials 18.6%, financials 15.3%, materials 12.1% and information technology 10.9%. ECNS is up 19.8% year-to-date.
Additionally, the iShares MSCI Hong Kong Small Cap Index (NYSEArca: EWHS) tracks the MSCI Hong Kong Small-Cap Index, which follows the bottom 14% of equity market cap of Hong Kong. Top sector allocations include consumer discretionary 45.2%, financials 18.8%, information technology 13.5%, industrials 9.2% and telecom services 4.2%.
For more information on China, visit our China category.
Max Chen contributed to this article.