Ratings: An ETF for China Growth

The iShares fund's strategy is focused on growth engines.
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Rapidly growing China seems to be on every investor's radar screen these days.

With that in mind, Ratings has uncovered an exchange-traded fund for those seeking exposure to the world's most populous nation.


iShares FTSE/Xinhua China 25 Index Fund

(FXI) - Get Report

, which has an eye-popping 40% one-year return, focuses on the largest companies in China (58% of holdings) and Hong Kong (42% of holdings). It is designed to generate a performance similar to that of the FTSE/Xinhua China 25 Index, which tracks the largest and most liquid companies in the Chinese (including Hong Kong) equity markets.

Indeed, the fund's focus on the large-cap and blue-chip stocks that have been powering the

Chinese market is this ETF's main appeal

. Ratings rates FXI a buy and gives it an A rating.

The fund has another near-term attraction: Chinese bank stocks -- and the Chinese stock market as a whole -- are likely to get a boost from the Industrial & Commercial Bank of China's upcoming initial public offering, which is garnering a lot of attention.

The bank, the country's largest, is aiming to raise between $15.91 billion and $19.08 billion through the IPO, which is scheduled for Oct. 27 on both the Shanghai and Hong Kong stock exchanges.

The fund, which will surely hold ICBC shares once they hit the market, is an ideal way to take advantage of any uptrend resulting from this IPO, as well as the continuing economic expansion in China.

The portfolio, as the below table illustrates, is diversified across sectors, including the telecommunications, oil and gas, and insurance industries.

In addition, five of the fund's top 10 holdings are in the financial sector, which has a 19.82% weighting in the portfolio.

This diversification, coupled with the significant stake in the Hong Kong market, helps mitigate the risks associated with investing in this often turbulent region. However, investors should remember that specific national and regional risks still exist, including the current crisis over North Korea's nuclear threats and China's conflict with the U.S. over the valuation of its currency, the yuan.

The fund's management has allocated 62% of assets toward its top 10 holdings.

The table below illustrates the performances of the iShares ETF and the China 25 index (FXI began trading in October of 2004; therefore, three- and five-year results are unavailable):

FXI has capitalized on China's rapid economic growth, returning impressive numbers over the past year and year to date. The fund's recent performance demonstrates that it is capable of maintaining this momentum. Ratings believes investors wanting to add some international exposure to their portfolios should take a look at this ETF. But as always, keep in mind that international investing comes with its unique blend of risks, so read those prospectuses!

Sam Patel, CFA, is the manager of mutual fund research for the Ratings.

In keeping with TSC's Investment Policy, employees of Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.

While Patel cannot provide investment advice or recommendations, he appreciates your feedback;

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