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An ETF For China's Smartphone Market

The thinly traded Global X China Technology ETF (CHIB) is not a spectacular pick for investors, given the lack of interest in its shares, but its portfolio has solid exposure to companies that will cash in on smartphones running Google's (GOOG - Get Report) Android operating system and benefitting from a more accessible Internet.

CHIB launched roughly the same time as Claymore/AlphaShares China Technology (CQQQ). While I continue to favor CQQQ as a pure technology ETF, CHIB's large telecom exposure, previously a handicap, is now a strength thanks to the emerging smartphone market.

China announced a telecom restructuring in 2008, which shook up the industry and created a third wireless competitor to China Unicom (CHU - Get Report) and China Mobile (CHL). The industry was hammered by the associated costs of restructuring and new regulations, and the stock prices of the companies involved declined.

Overall, this episode highlighted risks inherent of investing in state-owned enterprises (SOE); such risk is one reason why I have consistently favored Claymore/AlphaShares China Small Cap (HAO) over iShares FTSE/Xinhua China 25 (FXI). The government can step in at any time and change the rules on an industry, something that has hit the other sectors before. However, with SOEs, the government can also change the management and the company's assets and business lines.

Assuming investors opt for HAO over FXI to satiate their China exposure needs, the former is notably low on telecom exposure. Additionally, although HAO maintains some technology exposure at 12% of assets, I feel that a Chinese ETF should cover this fast-growing sector to a greater degree. With telecom restructuring in the rearview mirror, investors can focus on the future: smartphones.

Here's what's developing in the China smartphone market. Taiwanese chip maker Mediatek, a top 10 holding in iShares MSCI Taiwan (EWT), is targeting the low end of the consumer market in China with a new Android chipset. Whereas iPhone 4 will cost a Chinese consumer more than $1,000 dollars (The minimum wage in Shanghai, China's richest city, comes to about $2,000 per year), the Mediatek chips will be in phones that cost one-tenth that amount, yet carry nearly all the same functions and applications.

Android is an open-source operating system, and China Mobile has worked on making the Android operating system more hospitable to China's market, dubbing the operating system OPhone. Lenovo is already selling a device called the OPhone in China and Motorola (MOT) has also launched a phone using this software.
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