Why Market Vectors China ETF Is Different

NEW YORK ( ETF Expert) -- Plenty of retail investors as well as institutional money managers weren't able to get IPO shares of Facebook ( FB) at $38 per share.

Their initial disappointment stemmed from expectations that Facebook would finish Friday with a 20% gain around $45 or $46.

Yet the ability to get in on something -- even a "sure thing" -- isn't always what it is cracked up to be. On Monday, Facebook shares traded around $33 to $34, or 10% below the coveted offer price.

Similarly, over the last 10 years, scores of worldwide investors have clamored to move more of their capital into the world's second largest economy. Yet China severely limits external access to three-quarters of its local corporations. In fact, government restrictions have made China's "A shares" inaccessible to most foreigners.

Perhaps ironically, the inability to invest directly in local consumption-oriented industries on the Shanghai Exchange may have been a blessing in disguise. Prices are still down 60% from the October 2007 pinnacle.

More recently, however, export-dependent transports and interest-rate sensitive financials in SPDR S&P China ( GXC) have struggled mightily. Whereas GXC is flat year-to-date, the Shanghai Composite has gained roughly 10%.

Why the discrepancy? Since the beginning of the year, the Chinese government has been hinting at stimulating its local economy. Helping the rising middle class after years of intolerable inflation gives hope to the local population and businesses that can invest on the Shanghai Exchange.

What's more, over the weekend, Premier Wen Jiabao explained that the central government will boost domestic consumption to promote steady and relatively fast economic growth. Wen added that it also intends to implement structural tax reductions to ease companies' financial burdens.

And there's more. China's foreign exchange regulator announced this weekend that it will allow more domestic securities in overseas funds. The demand for access to middle class consumption in China via the country's capital markets should be particularly vibrant at a time when China is turning toward growth/easing/stimulating.

Few investors can get anywhere near China's A shares, and most U.S. ETF investors must rely primarily on funds like iShares China 25 ( FXI) and SPDR S&P China.

Because of that, do China's announced policy initiatives still matter for U.S. investors?

Yes. China's progrowth stance that has been years in the making should still be beneficial to all Chinese equities.

Unfortunately, the export-laden GXC and FXI are inexorably tied to Europe. They cannot break free entirely if Europe itself isn't importing Chinese goods or if European banks aren't able to function.

That said, China's commitments will give a boost to the global economy as well as to global confidence. A European "eurobond" solution could see GXC and FXI lead the emerging-market pack out of a two-year downtrend.

And there's still one additional option. Market Vectors China ( PEK) offers an indirect way to invest in local Chinese A-shares.

PEK invests in a variety of derivative instruments to gain performance exposure, and it is indeed having some success at doing so.

(Note: Like the Shanghai Index, PEK is up handsomely on the year.)

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Disclosure Statement: ETF Expert is a website that makes the world of ETFs easier to understand. Gary Gordon, Pacific Park Financial and/or its clients may hold positions in ETFs, mutual funds and investment assets mentioned. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert at the site.

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