How to Get in on the Chinese Stock Boom

by George Leong, B. Comm.

As many of you know, I’m a big supporter of Chinese stocks. The benchmark Shanghai Composite Index (SCI) is up a staggering 80% to date in 2009, but is stalling given the extent of the rally. The gains in China are impressive by all accounts, especially when compared against what U.S. stock markets have done. The NASDAQ is a top performer, up about 28% this year, while the small-cap Russell 2000 is up 11%.

The chart of the SCI shows the index in a strong upward trend above the short- and longer-term moving averages. The index is trading above the key short- and longer-term moving averages. Watch for some support at the 20-day moving average at 2,728 and the 50-day moving average at 2,608. As long as the trend remains intact, the SCI looks good.

The comparative returns between the U.S. and China emphasize the importance of geographical asset diversification outside of domestic markets to try to achieve greater overall portfolio returns.

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Playing the Chinese capital markets involves excessive political and economic risk. Yet, as we have said, you need to be well-diversified, which would enable you to play some Chinese growth stocks, especially those of the small-cap variety.

Some of you may be hesitant to play individual Chinese stocks. In this case, I also like some funds and ETFs. An example is the Dreyfus Premier G China (DPCRX) mutual fund and the PowerShares Golden Dragon Halter USX China ETF (AMEX/PGJ). Both the Dreyfus and Powershares have strong small-cap components, but if you are looking for more of a blue-chip focus, take a look at the iShares FTSE/Xinhua China 25 Index (NYSE/FXI), which holds the top major companies in China.

The iShares FTSE/Xinhua China 25 Index ETF is based on the Xinhua 25 Index, consisting of 25 of the largest and most liquid Chinese stocks. The FXI ETF is a relatively conservative play on Chinese stocks.

With $9.9 billion in assets as of June 30, 2009, the FXI ETF has delivered solid results since its launch on October 5, 2004. The current yield on the FXI ETF is 1.4%. The total expense ratio is 0.74%.

The FXI ETF has a large-cap focus and hence would be more suited to conservative investors, albeit even more speculative investors should have some large-cap holdings in their portfolio for diversification purposes. The ETF’s average P/E is 14.64X.

The FXI ETF has no software or hardware stocks. The five top sectors (as of June 30) include financial services (51.05%), energy (19.29%), telecommunications (15.85%), industrial (8.79%), and business services (2.59%). The large financial portion does present a higher-risk element.

The 10 top holdings as of June 30 are Bank of China, Bank of Communications, BOC Hong Kong, China Construction Bank, China Life Insurance, China Merchants Bank, China Mobile, China Shenhua Energy, CNOOC, and Industrial And Commercial Bank of China.

Performance-wise, the FXI ETF has done well versus its peer group, defined as the Pacific/Asia excluding Japan. Based on the NAV (net asset value), the FXI ETF has a three-year return of 16.48% versus 3.37% for the group. Year to date, the fund gained 33.02% versus 31.77% for its peer group. For the last three months, the FXI has gained 35.63%, compared to 33.77% for the group.

For those of you looking for some red-chip holdings but who may not want to have to select stocks, take a look at the FXI ETF. You should have a longer-term perspective due to potential above-average volatility. The risk of this ETF is above average based on a 1.39 beta versus the S&P 500.

How to Get in on the Chinese Stock Boom
by George Leong, B. Comm.

As many of you know, I’m a big supporter of Chinese stocks. The benchmark Shanghai Composite Index (SCI) is up a staggering 80% to date in 2009, but is stalling given the extent of the rally. The gains in China are impressive by all accounts, especially when compared against what U.S. stock markets have done. The NASDAQ is a top performer, up about 28% this year, while the small-cap Russell 2000 is up 11%.

The chart of the SCI shows the index in a strong upward trend above the short- and longer-term moving averages. The index is trading above the key short- and longer-term moving averages. Watch for some support at the 20-day moving average at 2,728 and the 50-day moving average at 2,608. As long as the trend remains intact, the SCI looks good.

The comparative returns between the U.S. and China emphasize the importance of geographical asset diversification outside of domestic markets to try to achieve greater overall portfolio returns.

Playing the Chinese capital markets involves excessive political and economic risk. Yet, as we have said, you need to be well-diversified, which would enable you to play some Chinese growth stocks, especially those of the small-cap variety.

Some of you may be hesitant to play individual Chinese stocks. In this case, I also like some funds and ETFs. An example is the Dreyfus Premier G China (DPCRX) mutual fund and the PowerShares Golden Dragon Halter USX China ETF (AMEX/PGJ). Both the Dreyfus and Powershares have strong small-cap components, but if you are looking for more of a blue-chip focus, take a look at the iShares FTSE/Xinhua China 25 Index (NYSE/FXI), which holds the top major companies in China.

The iShares FTSE/Xinhua China 25 Index ETF is based on the Xinhua 25 Index, consisting of 25 of the largest and most liquid Chinese stocks. The FXI ETF is a relatively conservative play on Chinese stocks.

With $9.9 billion in assets as of June 30, 2009, the FXI ETF has delivered solid results since its launch on October 5, 2004. The current yield on the FXI ETF is 1.4%. The total expense ratio is 0.74%.

The FXI ETF has a large-cap focus and hence would be more suited to conservative investors, albeit even more speculative investors should have some large-cap holdings in their portfolio for diversification purposes. The ETF’s average P/E is 14.64X.

The FXI ETF has no software or hardware stocks. The five top sectors (as of June 30) include financial services (51.05%), energy (19.29%), telecommunications (15.85%), industrial (8.79%), and business services (2.59%). The large financial portion does present a higher-risk element.

The 10 top holdings as of June 30 are Bank of China, Bank of Communications, BOC Hong Kong, China Construction Bank, China Life Insurance, China Merchants Bank, China Mobile, China Shenhua Energy, CNOOC, and Industrial And Commercial Bank of China.

Performance-wise, the FXI ETF has done well versus its peer group, defined as the Pacific/Asia excluding Japan. Based on the NAV (net asset value), the FXI ETF has a three-year return of 16.48% versus 3.37% for the group. Year to date, the fund gained 33.02% versus 31.77% for its peer group. For the last three months, the FXI has gained 35.63%, compared to 33.77% for the group.

For those of you looking for some red-chip holdings but who may not want to have to select stocks, take a look at the FXI ETF. You should have a longer-term perspective due to potential above-average volatility. The risk of this ETF is above average based on a 1.39 beta versus the S&P 500.