More To China Than Meets The Eye

Published on Tuesday, 07 February 2012 19:19 Written by Todd Shriber

New York, February 7^th (TradersHuddle.com) – Did you know that there are nearly 230 ETFs offering exposure to China, the world’s fastest-growing major economy? Granted the number of ETFs devoted exclusively to China is far smaller, but China’s growth story is well-represented in the ETF universe, but most of the assets in this universe are controlled by the iShares FTSE China 25 Index Fund (NYSE: FXI), by far the largest China-specific ETF with almost $6.9 billion in assets under management.

Home to many of the familiar state-run enterprises and some other familiar Chinese companies listed in the U.S., FXI is undeniably the most well-known China ETF on the market today. But there are other options to consider when it comes to China ETFs and one of them is the Global X China Industrials ETF (NYSE: CHII). The Global X China Industrials ETF is part of a suite of five China ETFs introduced by Global X starting in 2009.

More importantly for those that care about the here and now, not past history, CHII is up almost 22% year-to-date compared to "just" 14% for FXI. While CHII focuses on one particular sector, it is home to 39 stocks, making it 50% larger on that basis than FXI. As an aside, CHII has also sharply outperformed the Guggenheim China Small Cap ETF (NYSE: HAO) on a year-to-date basis.

One factor regarding CHII that is important to note is that the ETF does not include A Shares. Only stocks that are accessible to foreign investors are included in the index the ETF tracks. That means CHII’s holdings are predominantly Hong Kong-listed. No individual stocks receive an allocation of more than 5.8% and CHII’s top-10 holdings represent approximately 45% of the fund’s total weight.

What’s encouraging about CHII’s recent performance is that volume has started to increase. Granted, we’re talking about a low base of average daily turnover of 4,000 shares, but there have been days in 2012 when that number has been far higher. On Tuesday February 7 for example, CHII added 0.6% on more than 7,700 shares traded. That’s on the same day when FXI and HAO both traded lower.

Arguably what makes CHII all the more compelling at current levels is how Beijing may opt to engineer economic growth. If Chinese policymakers opt for domestic infrastructure projects to jolt Chinese growth, than few ETFs will reap the rewards of that policy like CHII will because CHII constituents will be counted on to get those infrastructure projects moving.

That’s the fundamental argument. The chart shows CHII has just started to peak above its 200-day moving average and some closes above $13 would prove important from a psychological standpoint. From there CHII could have upside to $15-$16.