Exchange traded funds to tap China's hot economic growth

Share

Last week was a difficult one for world equity markets. Equity indices in developed nations declined by as little as 1 per cent in Toronto and as much as 7 per cent in Paris and Athens. The major exception was the Shanghai Composite Index, up 2.2 per cent. The charts are telling us that China's economy has turned the corner. During the past year, the Chinese government has taken steps to dampen inflationary expectations by raising interest rates and by limiting credit availability. The Shanghai Composite subsequently fell 27 per cent from its high at the beginning of November last year to its low two weeks ago. Efforts to dampen the economy have succeeded. Inflation rates have peaked and GDP growth has stabilized at a lower, but healthy level near 9 per cent. The Chinese government is changing policy by encouraging growth through domestic spending instead of growth through exports to the Western World.

The easiest way to invest in China is with exchange traded funds. Thirteen ETFs are listed on U.S. exchanges and three are listed on Canadian exchanges. In addition, Morgan Stanley offers the Morgan Stanley China Fund, an actively traded closed end fund listed on U.S. exchanges.

All ETFs hold big cap Chinese stocks. Most frequently owned are China Mobil, China Construction, Industrial & Commercial Bank of China, CNOOC, PetroChina, Agricultural Bank of China and Baidu. Their main difference is their weight in various sectors, particularly in the Financial Services sector.

The investment product with the highest correlation with the Shanghai Composite Index is the Morgan Stanley China Fund . Its weight in the financial services sector is approximately 27 per cent, close to the weight in the Shanghai composite index.

The most actively traded ETF by far is iShares FTSE China 25 Index Fund . Units are approximately 50 per cent weighted in the financial services sector. The fund holds 25 equity securities. Management expense ratio is 0.72 per cent.

Second most actively traded ETF is SPDR S&P China ETF . Units are approximately 31 per cent weighted in the financial services sector. The fund holds 177 equity securities. Management expense ratio is 0.59 per cent.

Claymore offers the Claymore China ETF . The fund holds the Guggenheim China All-Cap ETF which, in turn, holds 191 equity securities. Weights are 29.4 per cent in the financial services sector, 18.0 per cent in the energy sector and 14.5 per cent in the information technology sector. Management expense ratio is 0.71 per cent.

Bank of Montreal offers the BMO China Equity Hedged to Canadian Dollars Index Fund . Units hold 50 equity securities. Weights are 25.7 per cent in Energy, 23.0 per cent in information technology and only 8.6 per cent in financial services. Management expense ratio is 0.71 per cent.

On the charts, the Shanghai Composite Index at 2,528 has a negative, but improving technical profile. Intermediate trend is down. However, the Index bottomed two weeks ago at 2,307.15 and since has advanced 9.6 per cent. Strength relative to the S&P 500 and TSX composite index turned positive two weeks ago. A move above its 50-day moving average at 2,464 last week was encouraging. Short-term momentum indicators are trending higher, but already are overbought. Seasonal influences are positive from the end of November to the end of April. Preferred strategy is to accumulate on weakness closer to its 50-day moving average as its period of seasonal strength approaches.

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. All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by JovInvestment. JovInvestment is the investment manager for the Horizons family of ETFs. Daily reports are available at http://www.timingthemarket.ca/