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China ETFs and the Regulatory Hammer

NEW YORK ( TheStreet) -- China has become a major area of focus as we embark upon the final months of 2011. With macroeconomic concerns weighing heavily across the globe, fears of a "hard landing" for this global economic growth engine are once again making the rounds.

Slowdown fears will likely present a challenge for ETFs designed to target the Chinese equity markets. For some funds, however, this may not be the only hurdle standing in the way.

In addition to hard landing fears, investors learned late last week that the U.S. Department of Justice had opened up an investigation into accounting irregularities found at Chinese companies listed on U.S. stock exchanges.

This is not the first time that U.S.-listed Chinese firms have faced scrutiny from regulators. In 2010 an investigation led by the Securities and Exchange Commission looked into Chinese reverse-mergers.

Much is still unknown as to where the current probe will lead and it will be interesting to watch how the case progresses. A Reuters report suggests that "criminal charges may be brought in addition to civil proceedings."

From an investment perspective, news of the investigation has weighed heavily on a handful of firms. During the final week of September, Chinese companies trading on U.S. exchanges like Baidu (BIDU - Get Report) and (SOHU - Get Report) fell 13% and 18% respectively.

Despite these regulatory hurdles, for ETF investors, China is not entirely off limits. Gaining exposure safe from the ongoing investigation, however, will require a keen eye.

The U.S. ETF universe boasts a wide collection of funds designed to provide investors with exposure to the Chinese companies. Not all are created equally, however. Rather, although they are both headlined by primarily large-cap companies, given their respective indexing strategies, a fund like the iShares FTSE China 25 Index Fund (FXI) will likely be affected differently than the PowerShares Golden Dragon Halter USX China Portfolio (PGJ).

Of these two funds, FXI is the best suited to handle the current scenario. The fund takes aim at the Chinese marketplace, targeting companies like China Mobile (CHL), China Construction Bank, and CNOOC (CEO) using securities that trade on the Hong Kong Stock Exchange.
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FXI $37.00 -2.50%
PGJ $31.86 -0.90%
BIDU $204.96 1.60%
CEO $107.99 -4.10%
CHL $57.98 -0.57%


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S&P 500 2,091.73 +2.86 0.14%
NASDAQ 5,130.2280 +14.0850 0.28%

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