ETFs For a Rising Yuan

The rising yuan will lift the value and earnings of Chinese companies, especially domestically focused companies that don't need to worry about export competitiveness.
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NEW YORK (TheStreet) -- China's surprise appreciation of the yuan sent markets into a frenzy on Monday, but the return to greater flexibility in the exchange rate is a long-term policy shift that will have investment implications for months and possibly years to come.

On the positive side, the rising yuan will lift the value and earnings of Chinese companies, especially domestically focused companies that don't need to worry about export competitiveness.

Claymore/AlphaShares China Small Cap

(HAO) - Get Report

remains the best choice with its heavier focus on domestic business, but the

iShares FTSE/Xinhua China 25

(FXI) - Get Report

will perform well in a general China rally.

Video: ETFs for a Rising Yuan >>

For somewhat conservative investors looking for a currency play,

WisdomTree Dreyfus Chinese Yuan

(CYB) - Get Report

could provide stable returns. The yuan is not a volatile currency and if appreciation continues, this can deliver small steady gains. It's also a defensive position, since in the event of a market correction, losses are likely to be small. I own the fund in my

ETF Action Newsletter

for these reasons.

Looking beyond China, larger gains are likely to be had in Asian emerging markets and some commodity areas, if history is any guide.

The initial report of the yuan revaluation sent the Korean won up more than 2% versus the U.S. dollar, the leader among a host of Asian currencies that advanced far more versus the greenback than the yuan. The export dependent nations of Korea, Malaysia, Indonesia, Vietnam, Thailand, Singapore and Taiwan generally tend to hold the value of their currency in line with the U.S. dollar to keep their exports attractive compared with China. With the yuan rising, these countries can allow their currencies to appreciate as well.

They are also likely to see greater demand from China for their goods and services, and in the case of Taiwan, an increase in tourism. On the same day as the currency announcement, both countries announced a joint slashing of cross straits airfare by 10 to 15%. China will also increase the number of flights to Taiwan by more than 10%.

Another thing these nations have going for them is low debt. Sovereign debt is a major concern for the developed world, but a number of Asian countries have already been through a sovereign debt crisis, the Asian Crisis of the late 1990s. Governments in the region have cleaned up their balance sheets and implemented financial reforms that continue to provide strong support for economic growth.

There also tends to be positive news coming from the region, such as the increased flights between Taiwan and China, while Indonesia eased restrictions on foreign investment earlier this month.

The ETFs for these countries are:

iShares MSCI South Korea

(EWY) - Get Report

;

iShares MSCI Singapore

(EWS) - Get Report

;

iShares MSCI Malaysia

(EWM) - Get Report

;

iShares MSCI Thailand

(THD) - Get Report

;

iShares MSCI Taiwan

(EWT) - Get Report

;

Market Vectors Indonesia

(IDX) - Get Report

and

Market Vectors Vietnam

(VNM) - Get Report

.

Year to date, THD, IDX and EWM are the better performing funds in this group of countries.

Investors who don't want to research the strengths and weaknesses of these ETFs can one-stop shop with

iShares MSCI All Country Asia ex Japan Index

(AAXJ) - Get Report

. It has 27% of assets in China, 18% in South Korea, 14% in Taiwan, 11% in India and 11% in Hong Kong.

Another sector seeing a gain on Monday was industrial commodities and raw materials such as copper, coal and steel.

Market Vectors Coal

(KOL) - Get Report

and

Market Vectors Steel

(SLX) - Get Report

are actually well positioned if the underlying commodities do well. SLX has 43% of assets in North America, where domestic supplies of raw materials provide stability for the industry. While the industry is not fully insulated from currency effects on commodity prices, a rising yuan will make U.S. steel more competitive.

KOL has hefty China exposure at 22% of assets, but it also has 47% in the United States. Indonesia and Australia, two coal exporters to China, make up 12% and 9% of the fund, respectively. A potential catalyst for coal assets could be the acquisition of mining properties by China's sovereign wealth fund.

Yet another route is to invest in the commodities via futures backed ETFs.

PowerShares DB Base Metals

(DBB) - Get Report

is a popular ETF with a portfolio split three-ways in copper, aluminum and zinc. Several brokerages highlighted aluminum as a possible winner, and investors can gain exposure with the

iPath DJ-UBS Aluminum ETN

(JJU) - Get Report

. However, the fund is lightly traded and ETNs carry credit risk, so DBB is a much better choice.

There's also the

SPDR S&P Metals and Mining ETF

(XME) - Get Report

, for investors who want to pick one fund with exposure to resource producers. Sector exposure amounts to 35% in steel, 24% in coal and consumable fuels, and 4% in aluminum.

Finally, if commodities should do well, then gold is unlikely to be left out of the equation. While the central bank has said it would not chase gold prices, retail investors have stepped up their buying. In the first quarter of 2010, the World Gold Council reports that Chinese jewelry demand (measured in tonnes) increased 8% from the first quarter of 2009 to 2010, while retail investment climbed 36%. China was the second largest gold buyer behind India.

By itself, a rising yuan wouldn't have a great effect on gold, but since it is already performing well and attracting a lot of investors, additional buying will have a larger impact.

SPDR Gold Shares

(GLD) - Get Report

,

iShares Comex Gold

(IAU) - Get Report

and

ETFS Gold Shares

(SGOL) - Get Report

are all solid choices.

At the time of publication, Dion Money Management owned THD CYB IAU.

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Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.