Energy ETF May Provide Safe Exposure to China

NEW YORK ( TheStreet) -- The China investment theme has taken a bashing lately, perhaps deservedly so as there are plenty of questions about the country's economic growth, its banks and its real estate sector.

There are risk factors, but there always have been.

What might be occurring is that investing in China is no longer as simple as it was five or six year ago, when all one had to do was buy iShares FTSE China 25 Index Fund ( FXI).

There are still some segments of the Chinese economy that can do well even if China's GDP growth declines significantly from current levels around 8%.

ETF provider Global X offers a suite of six Chinese sector ETFs including the China Energy ETF ( CHIE). The energy sector can continue to do well.

The thesis for buying this sector in China has been increasing demand. Eight years ago, per capita oil consumption in China was 1.25 barrels, vs. about 25 barrels in the U.S. Today per capita oil consumption has grown to 2.5 barrels and should continue to grow as the population continues to urbanize. Realistically, consumption in China will never approach that of the U.S., but it doesn't have to for the sector to continue to be viable.

Here's another way to think about it: China's population is four times that of the U.S., but China consumes only 8.2 million barrels of oil a day, about one-third of U.S. consumption. The Chinese oil majors are investing around the world because they believe domestic demand will continue to increase.

In the past, the biggest drawback to CHIE was the 9%-10% weighting in Chinese solar stocks.

I've written before that solar energy may be important but it is not yet economically viable. Solar stocks have declined sufficiently to reflect this reality.

Year to date, the solar stocks in CHIE have had declines ranging from 11%-60%. The one exception is Trina Solar ( TSL), which is down less than 1%.

As a result of these declines, solar now makes up only 6.5% of the fund and is less likely to be a drag on returns going forward. The shrinking of the solar stocks' weighting in the fund is an indication that these stocks have underperformed and have hurt returns.

Another potential catalyst for the fund could be the dividend yield. The fund has paid dividends once a year in the last two years.

The 26-cent dividend paid last December gives the fund a trailing yield of 2.1% The reduced exposure for solar means increased exposure to other companies that have larger dividends.

The three largest stocks in the fund are CNOOC Ltd. ( CEO), PetroChina Ltd. ( PTR) and China Petroleum & Chemical Corp. ( SNP), which yield 3.37%, 3.98% and 5.32%, respectively. There are several other stocks in the fund with yields greater than 4%.

One other positive for the fund is that the Shanghai Composite is down 60% since the U.S. market peaked in 2007. That type of decline discounts in a lot of negatives.

CHIE's performance over the next year depends on increasing energy consumption trends and how they are affected by the threat of an economic slowdown or an actual slowdown.

At the time of publication, the author had no positions in securities mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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