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Exchange-traded fund investors are suffering from their own "two Chinas" problem. And it has nothing to do with Taiwan.

Late last year, a pair of ETFs were introduced to meet the clamoring demand for China-based investment products: the

iShares FTSE/Xinhua China 25 Index


and the

PowerShares Golden Dragon Halter USX China Portfolio


. Although both ETFs arrived with equally huge expectations, a quick comparison shows a pretty big difference when it comes to performance over the past year. It also highlights to investors the fact that no two indices are alike, even if they are ostensibly covering the same subject matter.

Exchange-traded funds, or ETFs, are index funds that trade like stocks on major exchanges.

The iShares FXI, which tracks the 25 largest and most liquid Chinese companies trading on the Hong Kong exchange, is up 13.4% in 2005. Since its launch in October 2004, the FXI has grown to $1.3 billion in assets and trades around 200,000 shares a day. The expense ratio is 0.74%.

On the other hand, the PowerShares PGJ, which is composed of 51 U.S.-listed companies that derive most of their revenue from China, is down 3.6% year to date. The PGJ made its debut on the Amex last December and has since raised $79 million in assets. It has an expense ratio of 0.6% and trades just under 40,000 shares daily.

The main reasons for the vast difference in performance between the two ETFs is the concentration of assets and stock selection.

For example, both funds list

China Mobile





as their two largest holdings. However, the iShares FXI has a significantly heavier weighting, with 10.4% of its assets in China Mobile and 9% in PetroChina, compared with 5.7% each for the PowerShares offering.

That extra concentration helped the FXI a lot this year, since both stocks are up more than 50% in 2005. Overall, the FXI is far more concentrated, with 60% of its assets in its top 10 stocks, compared with 47% for the PGJ.

"Holding 25 names in a portfolio is somewhat concentrated, but the index caps each stock at 10% when it is rebalanced quarterly to prevent it from becoming too top heavy," says Diane Hsiung, portfolio manager for the FXI. Hsiung says that the China Mobile's position topping 10% will be brought back in line. She also points out that since the Hong Kong dollar is pegged to the U.S. dollar, currency exchange isn't too relevant to the fund.

There are inherent troubles of investing in a highly concentrated portfolio, however, and that is why some analysts prefer the more diversified PGJ.

"The FXI's appeal as a cheap way to gain access to arguably the best companies in a rapidly growing economic powerhouse is not without serious drawbacks," says Morningstar analyst Arijit Dutta. "Investors should consider the PowerShares ETF and mutual funds such as


Fidelity China Region that are more diversified."

Aside from having a heavier weighting in some of this year's big winners, the FXI also benefited from the large number of energy and commodity companies in its benchmark. Energy stocks -- and not just Chinese companies -- were the best performers of 2005 worldwide. The energy sector composed 25% of the FXI, compared with 19% of the PowerShares portfolio.

What it lacked in energy names, the PGJ made up for with Chinese Internet and technology companies, some of which trade only on U.S. exchanges. The PGJ holds shares of this summer's Internet IPO smash


, for example, whereas the FXI does not. However, the PGJ didn't get in on Baidu until after the stock's huge gains.

And many other of the tech companies held by the PGJ had less-than-stellar years.

Shanda Interactive Entertainment

( SNDA) is down close to 60% in 2005. The PGJ also has small holdings in online media company



and telecom-equipment maker



, which are down 23% and 62% for the year, respectively.

Still, some investors might find the PGJ less risky than the FXI, and not just because of its increased diversification.

"The PowerShares ETF provides an opportunity for investors to invest in China within the U.S. system, which is a strategy many investors find preferable considering that China is still an emerging market," says Tim Halter, managing director of the index that is tracked by the PGJ.

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