China ETF: Say Hello to YAO

NEW YORK ( TheStreet) -- The new Claymore/AlphaShares' China All-Cap ETF ( YAO) is aimed at a new group of China investors looking for a well-rounded fund.

In an ETF marketplace dominated by large-cap offerings like iShares FTSE/Xinhua China 25 Index ( FXI), and small-cap funds like Claymore/AlphaShares China Small Cap Index ETF ( HAO), YAO tries to achieve diversification.

YAO joins a pair of existing Claymore China funds, including HAO and Claymore/AlphaShares China Real Estate ETF ( TAO). FXI, the iShares behemoth, dominates when it comes to market share, with nearly 22 million shares changing hands each day.

FXI, however, takes a limited market-cap-weighted approach. Launched in October 2004, FXI seeks to track the 25 largest companies in the Chinese equity space, many of which are government-owned. Top components include China Mobile ( CHL), China Life Insurance ( LFC) and Cnooc ( CEO). Sector allocation is heavily weighted toward financials, which comprise more than 45% of the fund's underlying assets and makes FXI's sector exposure lopsided.

YAO's portfolio includes many of the same government-controlled giants as FXI, but also offers exposure to smaller-cap equities. While 53% of the YAO portfolio is currently dedicated to large-cap firms, mid- and small-cap companies comprise 33% and 10% of the portfolio, respectively.

The resulting mix in YAO's underlying basket offers a slightly more balanced view when it comes to sector allocation. Financials make up 34.87% of the portfolio, while energy and information technology make up 17.89% and 11.61%, respectively. Investors will still be weighted toward financials, but not cornered by a strong financial sector bias.

When it comes to sector balance, YAO's biggest competitor will likely be the SPDR S&P China ETF ( GXC), which focuses on large-cap China firms. GXC's top three sector holdings are also financials, energy and telecommunication, with 33.22%, 19.24% and 12.80% allocations respectively.

While YAO's sector allocations may be similar to GXC, the latest China ETF is bringing something new to the table. The fund's methodology is aimed at investors looking to add a broad China holding to their portfolio. This fund bridges the gap between large-cap offerings like FXI and small cap funds like HAO.

Interest in China continues to grow as investors regain their appetite for risk and seek returns in the emerging markets. The ETF industry will likely continue to reflect this trend, and YAO will not be the last China ETF to vie for a piece of the pie.

Investors seeking balance and liquidity in a Chinese equity fund should sit tight for a couple weeks and monitor YAO's trading volume. Liquidity is important when it comes to investing in emerging-market ETFs, and only time will tell if this fund catches on. Early indications are positive, however, and it seems like Claymore may have successfully balanced out its China trio.

-- Written by Don Dion in Williamstown, Mass.

At the time of publication, Dion does not have any positions in the fund mentioned.

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.

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