NEW YORK ( TheStreet) -- On Nov. 17, China removed the barriers between the Hong Kong and Shanghai stock exchanges, opening Chinese domestic shares to foreign investors. That reduces the games played between different classes of Chinese shares and enables us to evaluate them on an equal basis with other possible investments. With such evaluation, it becomes clear that a wise investor will include a modest but growing Chinese component in his overall portfolio.
A thoughtful approach to China suggests investment in the Guggenheim China Small Cap ETF (HAO) , which invests in Chinese companies with a float of less than $1.5 billion and attempts to match the performance of the AlphaShares China Small-cap Index.
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The Shanghai Composite Index closed Friday at 2,938, up 35% on the past year and up more than 19% on the day the market was opened to foreign investment. Some have suggested the market might be in a bubble, but when you look closer, that appears unlikely. The index is below its levels touched in 2009-2010, when stock markets globally were just beginning their long recovery. It's trading at less than half its all-time peak in October 2007.
It is also less than double its level 15 years ago. In addition, the market claims to be on an average price-to-earnings ratio of only 14.4, well below the levels in New York (but more on the "E" in that P/E below). Given the extraordinary growth in the Chinese economy and stock market over the last couple of decades, the market looks under- rather than over-valued.
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