6 Easy Ways to Capitalize on Chinese Stocks
By Ron DeLegge, Editor
August 6, 2009
SAN DIEGO (ETFguide.com) Ė Since bottoming in March, emerging market stocks (NYSEArca: EEM) have charged ahead by some 80%. And Chinese stocks have been leading the charge. How can you capitalize?
The Basics of Chinese Share Classes
Chinese equities are generally divided into three groups: A-shares, H-shares and Red Chips. Many publicly traded Chinese companies have simultaneous listings of these share classes on the Hong Kong exchange along with Chinaís two mainland stock markets.
A-shares can only be bought or sold by Chinese citizens and they are listed on either the Shanghai or Shenzhen stock exchange. Some companies offer both A-share listings along with H-shares.
H-shares are offered by companies incorporated in China and are listed on the Hong Kong Stock Exchange or another foreign exchange. They are governed by Chinese law and their shares trade in Hong Kong dollars.
H-shares and A-shares on the same company often trade at large price discrepancies. Generally, A-shares trade at a premium to H-shares because of ownership restrictions imposed by the Chinese government. Foreigners are prevented from investing in A-shares whereas only citizens of China can buy them. Despite these differences, the demand for H-shares has increased, especially since 2007, when investing in the Hong Kong market was opened to Chinaís mainland residents.
Red Chips are Chinese stocks listed on the Hong Kong Stock Exchange but incorporated internationally. Foreigners are allowed to invest in Red Chips. Some Red Chips also issue A-shares, but only Chinese citizens can invest in them.
Letís evaluate some of the key Chinese ETFs:
iShares FTSE/Xinhua China 25 (NYSEArca: FXI)
The performance and yield of FXI is linked to the FTSE/Xinhua China 25 Index. The index consists of the 25 largest and most liquid Chinese companies. Individual constituent weightings are capped at 10% to avoid over concentration. All index components trade on the Hong Kong Stock Exchange and are also constituents of the FTSE All-World Index. The index is reviewed quarterly. FXI has $9.8 billion in assets.
Year-to-date*, FXI is ahead by 48.35%. In 2008, FXI retreated 49.88% and the fundís annual expense ratio is 0.74%.
SPDR S&P China ETF (NYSEArca: GXC)
GXC is benchmarked to the S&P/Citigroup BMI China Index and contains 338 stocks. The index is a float-adjusted market capitalization weighted index that tracks the investable universe of publicly traded companies domiciled in China that are legally available to foreign investors. GXC is more broadly diversified than FXI because it contains market exposure to small stocks.
Year-to-date, GXC has climbed 52.06%. In 2008, GXC fell 50.68% and the fundís annual expense ratio is 0.60%.
iShares FTSE/China Index Fund (NYSEArca: FCHI)
FCHI follows the FTSE China (HK Listed) Index. The index is designed to track the performance of the large-and mid-capitalization companies in the Chinese equity market that are available to international investors and consists of many of the largest and most liquid Chinese companies. Each security is a current constituent of the FTSE All-World Index and currently trades on the Hong Kong Stock Exchange. FCHI currently has 91 holdings and around $30 million in assets.
Year-to-date, FCHI has jumped 43.60%. FCHI was launched in June 2008 and the fundís annual expense ratio is 0.74%.
iShares MSCI Hong Kong (NYSEArca: EWH)
EWH follows the MSCI Hong Kong Index and contains 41 stocks. The index measures the performance of the Hong Kong equity market. The index is a capitalization-weighted index that aims to capture 85% of the (publicly available) total market capitalization.
Year-to-date, EWH has risen 47.93%. In 2008, EWH declined 51.50% and the fundís annual expense ratio is 0.52%.
ProShares Ultra FTSE/Xinhua China 25 (NYSEArca: XPP)
If youíre bullish on Chinese equities, take a look at XPP. This leveraged ETF attempts to deliver twice the daily performance of the FTSE/Xinhua China 25 Index. XPP was just launched in June and currently has $11 million in assets. The fundís annual expense ratio is 0.95%.
Proshares Ultrashort FTSE/Xinhua China 25 (NYSEArca: FXP)
This leveraged ETF attempts to deliver twice the inverse or opposite daily performance of the FTSE/Xinhua China 25 Index. So far this year, shorting Chinese stocks has been the wrong move. FXP has cratered 72.33% and has around $200 million in assets. The fundís annual expense ratio is 0.95%.
Can Chinaís Run Continue?
In 2008, Chinese stocks were cut in half but have since staged a powerful reversal. Is the run in Chinese and emerging market stocks sustainable? It could be a mistake not to ask this question.
Many observers believe Chinaís rebound has been fueled by excessive liquidity from loose bank lending standards, rock bottom interbank interest rates and lax government oversight. Others are convinced China will defy todayís global economic recession and keep growing. Who will be right?
Regardless of whether youíre a bull or bear, Chinese ETFs give investors the opportunity to profit in either scenario.
*Performance figures through market close of 8/5/09