Top China ETF and Mutual Fund

Don Dion picks his top China ETF and mutual fund.
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NEW YORK (

TheStreet

) -- In a head-to-head competition with the best China ETFs and mutual funds, my pick for the best China ETF,

Claymore/AlphaShares China Small Cap

(HAO) - Get Report

, comes out on top. Returns are through July 31, other data is the most recently reported.

In addition to HAO, I compared two ETFs --

PowerShares Golden Dragon

(PGP) - Get Report

and

iShares FTSE/Xinhua China 25

(FXI) - Get Report

-- plus two mutual funds --

Matthews China

(MCHFX) - Get Report

and

Fidelity China Region

(FHKCX) - Get Report

.

As of July 31, the largest of these funds was FXI, with $11 billion in assets. Both mutual funds had just under $2 billion in assets. PGJ had $450 million in assets, while HAO had $175 million, large enough to provide ample liquidity.

In terms of fees, the ETFs are cheaper. PGJ is the lowest, at 0.6 % of assets; HAO is next, at 0.7 %; then FXI, at 0.74 % of assets. MCHFX costs 1.23 % compared to 0.96 % for FHKCX. Clearly, there's a price to having a manager watching your investment, but Fidelity does manage to get reasonably close to the cost of ETFs.

Next, I compared turnover. Fidelity China Region had 133% turnover vs. 8% for Matthews China. Matthews China was lower than both FXI and PGJ, which had turnover of 24% and 20%, respectively. HAO did not have data.

A comparison of their portfolios shows wide variation. FXI is the most concentrated and the most heavily invested in large caps. It has 60% of its portfolio in the top 10 holdings and sports an average market cap of $46.3 billion. Next was PGJ, with 45% in the top 10, but with an average market capitalization of only $5.6 billion. FHKCX holds 34% in the top 10, with an average market cap of $14 billion, while MCHFX has 29% in the top 10 and an average market cap of $6 billion. Finally, HAO holds 21% in the top 10 and has an average market cap of $4.3 billion.

All these statistics are well and good, but it boils down to return. The 2009 rally has been kind to Claymore/AlphaShares China Small Cap, which delivered an 80.8% return in the seven months through July 31, outdistancing the competition by a wide margin. iShares FTSE/Xinhua China 25, the China mega-cap fund, finished behind the pack, up 45.1% over the same period. Finishing above it was Fidelity China Region, up 52.6%. PowerShares Golden Dragon and Matthews China (MCHFX) finished with similar returns, 56.4 % vs. 56.8%.

Last year, FHKCX lost 44.9% compared to the 49% drop in MCHFX. The better return may be chalked up to the difference in turnover, as Matthews China held through the decline with only 8% turnover. In the past three-, five- and 10-year periods, MCHFX returned an annualized 22.37%, 21.72% and 16.30%, respectively. FHKCX returned an annualized 12.34, 15.96 and 9.75%, respectively.

Previous annual returns are mixed. MCHFX has both outperformed and underperformed FHKCX. During the major bull years, Matthews China crushed Fidelity China Region, with 60 to 70% returns versus 30 to 40% returns. In tepid or down years, Fidelity was the stronger performer. Nevertheless, in 2009 FKHCX appears to be doing better than expected.

I selected FKHCX as the

best mutual fund

for the third quarter because of this better performance, which I believe is due to manager Wilson Wong, who took the helm in June 2007. Morningstar analyst Christopher Davis said of him, "Wong deserves credit for some deft maneuvers."

Davis believes that Wong succeeded in a tough economy because he "de-emphasized consumer-discretionary and export-oriented industries, which were hurt most by the global economic slowdown, and turned to more-defensive (domestically driven) areas like telecom." It remains to be seen whether Wong can best the experience of Richard Gao, who has managed Matthews China since 1999, but his two-year record is impressive.

In the end, Claymore/AlphaShares China Small Cap should deliver

the best return

in bull rallies and bull markets because of the outperformance of small cap stocks and the fund's larger exposure to private companies, rather than state-owned ones.

HAO did underperform during the market's slide, however, leaving an opening for the active management offered by Fidelity and Matthews. Even with their higher fees, these funds are delivering returns equal to or better than ETFs.

At the time of publication, Dion owned PowerShares Golden Dragon and Fidelity China Region.

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.