Chinese equities and related exchange traded funds and closed end funds moved higher last week following encouraging economic news. China’s gross domestic product in the second quarter rose at a 9.5 per cent annual rate, slightly beating the consensus estimate of 9.4 per cent. The report confirmed that the world’s second largest economy continues to grow at a rapid rate.
The easiest way to invest in China is with exchange traded funds (ETFs). Investors with U.S. dollars can choose between 11 exchange traded funds listed on U.S. exchanges and investors with Canadian dollars can choose between three exchange traded funds listed on the Toronto Exchange.
Only four U.S.-listed ETFs have a market capitalization in excess of $150-million and are worth considering for investment purposes. Each has unique characteristics.
By far the most actively traded China ETF is iShares FTSE China 25 Index units . The Index tracks twenty five big cap Chinese equities. A word of caution: The Index is heavily weighted in one sector. Financial Services represents approximately 51 per cent of the Index. The net result is that units have a relatively low correlation with the benchmark Shanghai Composite Index. Management expense ratio is 0.72 per cent.
Investors looking for an actively traded security that has a high correlation with the Shanghai Composite index might consider the Morgan Stanley A Fund , a closed end fund that owns a more diversified portfolio than the iShares unit.
State Street Global Advisors sponsors the SPDR S&P China ETF The ETF tracks the S&P China BMI Index, a capitalization weighted index based on a diverse portfolio of Chinese equities available for international investment. Weights in the portfolio are approximately 33 per cent financial services, 16 per cent energy, 13 per cent information technology and 9 per cent industrials. Management expense ratio is 0.59 per cent.
PowerShares offers the Golden Dragon Halter USX China Portfolio ETF . The portfolio consists of 205 Chinese based equities. Sector weights tend to be more focused on economically sensitive sectors than other China ETFs. Weights are approximately 23 per cent information technology, 21 per cent energy, 14 per cent telecommunication services, 11 per cent consumer discretionary and 10 per cent industrials. Management expense ratio is 0.70 per cent.
Guggenheim offers the Guggenheim China Small Cap ETF . The ETF tracks the AlphaShares China Small Cap Index represented by 200 small cap equities. Equities based in China represent 84 per cent of the portfolio’s weight and equities based in Hong Kong represent 15 percent. Weights by sector are approximately 21 per cent industrials, 18 per cent materials, 15 per cent consumer discretionary, 14 per cent financial services and 12 per cent information technology. Management expense ratio is 0.75 per cent.
BMO Financial Group offers the BMO China Equity Hedged to CAD Index ETF . The ETF tracks the BNY Mellon China Select ADR Index consisting of 64 Chinese based stocks. Sector weights are approximately 26 per cent information technology, 25 per cent energy, 18 per cent telecommunications and 12 per cent consumer discretionary. Management expense ratio is 0.65 per cent.
Claymore offers the Claymore China ETF . The ETF owns units in the Guggenheim China All-Cap ETF (YAO) which, in turn, holds a diversified portfolio of 192 Chinese securities tradable in the U.S. as deposit receipts. Sector weights are approximately 33 per cent financial services, 17 per cent energy, 14 per cent information technology and 9 per cent industrials. Management expense ratio is 0.70 per cent.
iShares Canada offers iShares China Index Fund . The fund holds iShares FTSE China 25 Index units that are hedged against fluctuations in the U.S. dollar relative to the Canadian Dollar. Management expense ratio is 0.85 percent.
Seasonal influences for the Shanghai Composite Index are favourable from the end of October to the beginning of May.
On the charts, the Shanghai Composite Index at 2,820.17 has a negative, but improving technical profile. Intermediate trend is down. The Index recently found resistance near its 200-day moving average. Strength relative to the S&P 500 Index has been negative since mid April. Short-term momentum indicators are overbought and showing early signs of rolling over. On the other hand, the index recently bounced from support at 2,610.99 and moved above its 50-day moving average.
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst for JovInvestment Management Inc. Reports are available at www.timingthemarket.ca.