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.



Chinese ETFs - 2012

Sure, a couple weeks trading is nothing to hang your hat on, but the early returns are positive.

Guggenheim’s HAO was last year’s biggest loser among Chinese market-cap funds, and this year it’s leading the pack.

For investors entrenched in their belief that 2011 was merely a bump in the road for Chinese equities, HAO may turn out to be their golden goose. After all, the fund is a high-risk bet on an economy that in many ways is a high-risk bet on global economic growth.

For investors in FXI, the early part of 2012 has treated them nearly as well, without the additional risks associated with HAO’s small-cap portfolio.

So far, FXI has given investors more for bang for the buck on a risk-adjusted basis, but that’s likely an anomaly, as over the course of a full trading year, HAO’s higher beta should provide returns that are more in line with its risk profile should the Chinese market really turn in a banner year in 2012.

We may have a long way to go in 2012, but the writing may be on the wall, or better yet, the on Great Wall. Whether it means Chinese ETFs are once again a “must-own” for portfolio managers remains to be seen.

But, if you believe what the market has told you so far, the only choice you have to make is how aggressively you want to jump in. Whether you choose to do so with both feet or wade in, the array of Chinese ETFs gives you a number of ways to proceed.


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