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Three Favorite ETFs For Investing In China

 February 23, 2009 09:59 AM

"In my view, there is no sign of a sustainable rally in the US stock market on the horizon," says Glenn Rogers, asking, "So, against that gloomy backdrop, what's an investor to do?"

The contributing editor to Gordon Pape's Internet Wealth Builder suggests, "One area that looks interesting to me right now is China." Here, he highlights a trio of exchange-traded funds invested in the China market.

"The Chinese government is unencumbered by highly-paid bankers and fractious two-party politics so they have been able to move quickly to stimulate their economy and are generally well-positioned to come out of this downturn in good shape.

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"To be sure, they still have to live in the global economy and the rest of the world isn't buying as many of their goods as before. As a result, factories are closing, throwing people out of work. That will certainly slow down their domestic economic growth.

"However, let's not lose sight of the fact that China's economy has been growing very fast, probably too fast for its own long-term health. So this slowdown may give the government an opportunity to put a brake on labour costs before they get ahead of themselves.

"Also, input costs for raw materials have dropped dramatically and China is actively seeking to buy up good-quality commodity companies on the cheap while they can.

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"In any case, whenever the recovery comes you will benefit from having exposure to the Chinese market over the long haul. Meanwhile, there are several ways to play China through exchange-traded funds (ETFs). Here are three that I use:

"iShares FTSE/Xinhua China 25 Index Fund (NYSE: FXI) is designed to track the performance of the FTSE/Xinhua China 25 Index which covers the largest and most liquid Chinese companies that are available to foreign investors.

"If you like, it's the Chinese version of the Dow. All the securities in the Index trade on the Hong Kong Exchange and include such giants as China Mobile, China Telecom, China Life Insurance, and PetroChina.

"As with all China funds, the past six months have been brutal as this ETF recorded a loss of 43%. Of course there could be more downside from here and the fund has a high beta of 1.51 (using the S&P 500 as a reference point). So don't invest unless you can live with volatility.

"iShares MSCI Hong Kong Index Fund (NYSE: EWH)  is much more broadly-based than FXI, covering 85% of the publically available capitalization of the Hong Kong market.

"If you want a North American comparison, the Wilshire 5000 would come closest. It has a lower MER than FXI, at 0.52%, and a lower beta as well at 1.1. Top holdings include Hang Seng Bank, Hong Kong Electric, and Hutchinson Whampoa.

"The fund yields 5.96% at current levels and represents excellent value at this level for patient investors.

"Finally, PowerShares Golden Dragon Halter USX China Portfolio (NYSE: PGJ) takes a completely different approach. It tracks the Halter USX China Index which is comprised of the U.S. listed companies that derive a majority of their revenue from the People's Republic of China.

"It's an all-cap fund that offers a somewhat different mix of names from the iShares entries. Top holdings include Baidu (which some people call the Chinese equivalent of Google), CNOOC, Huaneng Power, and Aluminum Corp. of China.

"I think a combination of FXI and EWH works best since the companies owned are different and the volumes are higher than with PJB. All of them trade more or less in tandem although FXI tends to do a little better.

"All three ETFs have been hammered recently but are up from their November lows. I recommend starting to building positions in FXI and EWH now with the idea of holding them for at least a year or two.

"However, don't commit all available funds immediately so that you can average down in the event of a price pull-back."

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