China ETFs Get New Kid on the Block

NEW YORK ( TheStreet) -- The new Claymore/AlphaShares China All-Cap ETF ( YAO) offers broader access to China than the widely known iShares FTSE/Xinhua China 25 Index Fund ( FXI). The Claymore fund has 99 holdings, four times that of the iShares fund, and the exchange traded fund has stakes in small- and mid-cap stocks, not only mega caps.

While that's the Claymore ETF's billing, something appears to get lost in the implementation. The 13 largest holdings, which account for 49% of assets, are the big Chinese stocks you have known for years, like China Life Insurance ( LFC) and PetroChina ( PTR). The top 10s of each fund have six names in common. At the industry level, both are heaviest in financials, at 35% for the Claymore fund and 51% for the iShares ETF.

That both funds are dominated by financials is a potential risk. The bear case for China focuses on how much growth is coming from government spending and whether the Chinese stimulus plan is sowing the seeds of a lending bubble similar to what occurred in the U.S. Some would also add the lack of potable water and demographic issues as other looming problems. While those risk factors would make for a good debate, if they play out negatively, the financials would seem most likely to be adversely affected.

From a big-picture view, China is new to capitalism, so it makes sense to expect that there will be policy mistakes that serve to mismanage the growth story, which, again, threatens financials more than most other sectors. I believe it makes more sense to go narrower, focusing on internal growth, modernization and general improvement of living conditions, while avoiding some of the more obvious risks. Tying into this idea, I would want to avoid companies or funds that rely on exports. Exporters and associated companies rely on the health of the U.S. consumer, which may not be a great bet these days.

For people disinclined to buy individual Chinese stocks, a better way into the country than buying a broad fund like Claymore/AlphaShares China All Cap ETF might be to purchase specialized or thematic funds heavy in Chinese stocks without the risk factors mentioned earlier.

As an example, using iShares Emerging Market Infrastructure ETF ( EMIF) for 5% of a portfolio and the same amount in PowerShares Global Coal Portfolio ( PKOL) would create an overall portfolio weight of 2.7% in China. Fund provider GlobalX has filed for six Chinese sector ETFs which, when they are listed, will make it easier to open up exposure but still avoid obvious risk spots.
At the time of publication, EMIF is a client holding.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.

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