Time For Chinese ETFs Again?

January 20, 2012

Last year was a nightmare for investors holding Chinese ETFs. But that story could be, well, so last year.

It’s true that funds covering the entire market-cap spectrum fell sharply last year, and cracks in the Chinese economy started to show.

Few, if any, things went right for investors in Chinese ETFs in 2011. The economy slowed, manufacturing output slowed and the market tanked. Look no further than the chart below to see how bad it really was.

Chinese ETFS - 2011

The iShares FTSE China 25 Index Fund (NYSEArca: FXI), which focuses exclusively on Chinese large-caps, was the best performer of the lot. Still, it lost investors over 16 percent on a total return basis in 2011, making it a pretty hollow victory.

The PowerShares Golden Dragon Halter USX China Portfolio (NYSEArca: PGJ), which provides total market exposure to China, also took it on the chin in 2011, losing 19 percent. Bringing up the rear was the Guggenheim China Small Cap fund (NYSEArca: HAO), which lost nearly 26 percent in 2011.

China-focused sector and theme funds fared even worse: The Global X China Materials (NYSEArca: CHIM) fell 41 percent, the Global X China Financials (NYSEArca: CHIX) lost 23 percent and the EGShares INDXX China Infrastructure ETF (NYSEArca: CHXX) dropped 28 percent.

While these returns speak to the increasing risk of investments as they move down the market-cap spectrum and focus more narrowly on segments of the economy, it also speaks to how brutal 2011 was for people banking on the Chinese miracle. There really was no shelter from the storm.

Turning Of The Tide?

But, as the calendar has turned, so have investors’ fortunes in the sleeping dragon. So far this year, Chinese ETFs are back on the rise.

This could be partly due to the fact that after a year when so many things went wrong globally and so many challenges flared domestically, the Chinese economy still managed to grow at 9.2 percent in 2011.

One of the biggest arguments China bulls make, after all, is that China’s growth is so strong that any sort of slowdown would merely take its GDP growth from 10+ percent to 8 percent or so. The World Bank this week gave the bulls something to chew on, with a forecast for 2012 Chinese growth to come in at 8.4 percent.

It sure seems like investors are buying in, as the following chart shows quite a reversal of fortune for investors in Chinese ETFs so far in 2012.


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