NEW YORK (TheStreet) -- China funds have been rallying. During the past three months, the average China fund returned 12.1%, according to Morningstar.Investors have taken notice of the strengthening environment, putting $2 billion into iShares FTSE China 25 Index ETF ( FXI) this year. Positive economic news has been spurring the market gains, says Morningstar analyst Patricia Oey. Retail sales in China have been climbing, growing at an annual rate of 14.5% in October. After slowing for months, industrial production growth has stabilized at a healthy annual rate of 9%. Economists say the improving picture may be connected to a temporary increase in infrastructure spending this year. The government mandated the stimulus to strengthen the economy at a time when a new leadership team is about to take office. CHXF). The WisdomTree fund is broadly diversified with 13% of assets in consumer staples, 24% in energy, and 15% in telecommunications. By putting half of your stake in each of the two funds, you would have 29% of the assets in financials, a reasonable allocation.
The WisdomTree fund uses a careful weighting system to insure diversification. The portfolio always includes assets in nine sectors, and no one sector can account for more than 25% of assets. No one stock can account for more than 10% of assets. In each sector, stocks are weighted according to the total dividends that they pay. So companies with rich dividend streams dominate the fund. That could help to stabilize results because dividend payers tend to have reliable cash flows and solid balance sheets. Holdings include China Mobile ( CHL), a dominant cellular provider, and oil giant PetroChina ( PTR). WisdomTree research director Jeremy Schwartz argues that the outlook for the portfolio companies remains bright. "Growth in China could slow, but the prospects are still strong for many of the leading companies," he says. GXC), which has 29% of assets in financials. Holding $952 million in assets, the SPDR ETF owns stocks listed in Hong Kong and New York. The New York listings include such fast-growing technology stocks as Internet search giant Baidu ( BIDU) and NetEase ( NTES), which provides Internet portals and online games. In contrast, the iShares China fund focuses on stocks listed in Hong Kong and emphasizes big state-owned banks. Oey also likes iShares MSCI Hong Kong ( EWH), which has 26% of assets in financials. The ETF has $2.9 billion in assets. Instead of focusing on state-owned banks, the index concentrates on private banks that have more freedom to avoid bad loans. The financial holdings also include Hong Kong property developers that have been benefiting from growing demand for real estate. Follow @StanLuxenberg This article was written by an independent contributor, separate from TheStreet's regular news coverage.