Saturday, August 25, 2007

Investing in China: Fund Choices

As a Chinese citizen, I have a natural tendency of investing in China. Here is my summary of the representative funds available to investors in the U.S.

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FXI (iShares FTSE/Xinhua China 25 Index)
Expense Ratio: 0.74%
Turnover Rate: 45%

Index fund tracking the FTSE/Xinhua China 25 index (25 largest Chinese companies traded in Hong Kong), weighted on their float-adjusted market caps, with a cap of 10% on the largest holdings.

Pros:
Index fund, lower cost than actively-managed funds. Highly popular and liquid.

Cons:
Highly concentrated on state-owned giant companies. The turnover of 45% is very high for an index fund, probably because the 10% weight cap, which China Mobile is currently hitting, requires frequent rebalancing.

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PGJ (PowerShares Golden Dragon Halter USX China)
Expense Ratio: 0.70%
Turnover Rate: 17%

Index fund tracking the Halter USX China index (Chinese companies listed in the U.S. as ADRs).

Pros:
Index fund, lower cost than actively-managed funds. Underlying traded in the more mature U.S. market. Less risky.

Cons:
Because the underlying is traded in the more mature and less risky U.S. market, its return could be lower too. Plus it's correlated to the U.S. market, so it does not provide very good diversification.

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GXC (SPDR S&P China)
Expense Ratio: 0.60%
Turnover Rate: unknown, presumably very low

This is a new fund tracking the S&P Citigroup BMI China Index. This fund is the broadest so far, with about 200 underlying holdings traded either in Hong Kong or the U.S., weighted on their float-adjusted market caps. (It's not quite clear where they buy shares of these companies traded in both Hong Kong and the U.S., e.g. China Mobile.)

Pros:
Broadest index fund available. Could be the best choice for indexers and the core China holding for everyone.

Cons:
Although not as highly concentrated as FXI, this fund is also dominated by giant companies. For example, it has 12.5% of its asset in China Mobile. Not as liquid as FXI.

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CAF (Morgan Stanley China A Share)
Expense Ratio: 1.98%
Turnover Rate: 14%

Actively-managed and closed-end fund investing in China A shares (companies listed in Shanghai and Shenzhen) through QFII (Qualified Foreign Institutional Investor) quota.

Pros:
The only fund available to U.S. investors that invests directly in the China domestic market. Least correlated to the U.S. market. Excellent diversification. Low turnover.

Cons:
Investing directly in China domestic market could be very risky. The market valuation is very high (P/E ratio). Being a closed-end fund could be risky too. However, the current heavy discount (15%~20%) provides some cushion for risk. High expense ratio, due to the lack of alternative funds.

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MCHFX (Matthews China)
Expense Ratio: 1.26%
Turnover Rate: 12%

Actively-managed mutual fund investing in large companies in China and Hong Kong.

Pros:
Low turnover, good for tax-efficiency. Not as concentrated on giant state-owned financial and energy companies as FXI.

Cons:
Low turnover, which makes you wonder if the manager actually does anything.

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OBCHX (Oberweis China Opportunities)
Expense Ratio: 1.91%
Annual Turnover: 53%

Actively-managed mutual fund investing in small to mid-size companies in China, Hong Kong, Taiwan and Singapore.

Pros:
Exposure to small and mid-size companies. Can be used to complement other large-cap funds.

Cons:
Could be more risky than large-cap funds. Never use it as a core China holding. Also, because of the lack of similar mid/small-cap indexes/funds, its performance is hard to judge. High expense ratio.

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