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Greater China ETFs

Written By Brian Hicks

Posted March 24, 2008

"I just bought 200 shares… on the stock exchange in Hong Kong. I mean, how cool is that? That’s China!"

That’s straight from the new TV ad campaign for online brokerage E-Trade (NYSE:ETFC).

Keep in mind, though, that the Hong Kong Stock Exchange is a very different animal from the Shanghai market. And brokers who muddle their geography just to take advantage of China’s rip-roaring growth stand to do serious damage to your international portfolio.

They’re also missing out on major profit plays in more mature regional markets right in China’s backyard.

E-Trade has Greater China wrong… but here’s how you can get it right, with Greater China ETFs from Hong Kong, Taiwan, and Singapore.

"Greater China" refers to China, Taiwan, Hong Kong, Macau (Hong Kong’s often-forgotten neighbor and world gambling capital), and sometimes Singapore, where three-quarters of the population is ethnically Chinese. However, simply calling all of these "China" will get you a scowl from many natives… and a hole in your pocketbook if you invest in the fallacy that E-Trade is spouting.

Think There’s One China? Check the Headlines and Profit with these Greater China ETFs

Which do you prefer: "China’s Olympic Flame Lit Amid Protests" or "Markets Surge in Taiwan as Election Raises Hopes for Mainland Ties?"

Fortunately you have a variety of exchange-traded fund (ETF) tickers to shuffle around Greater China as current events deliver sizable market pops.

The iShares MSCI Taiwan Index ETF (NYSE:EWT) beat the pants off of the S&P 500 from April to November of 2007, but the iShares FTSE/Xinhua China 25 Index (NYSE:FXI) was positively stratospheric, quintupling the Taiwan (Republic of China) fund at its peak.

Since autumn, stock markets have been beaten down across the globe, and no Greater China exchange escaped the slump.

But then in the past month, anticipation of Taiwan’s presidential election this past weekend brought exuberance to Taiwanese stocks, reversing the year-long trend. Ma Ying-jeou, the opposition candidate who emerged victorious, has urged greater economic cooperation between Taiwan and mainland China, and investors are eating it up.

The coming thaw will include regularly scheduled direct airplane flights (currently Taiwanese have to bounce off of other nearby ports if they are headed to the People’s Republic of China), and Ma has also pledged to let loose Taiwanese investment in Chinese enterprises to tap the double-digit GDP growth and 1.3 billion-person marketplace.

Combine this rosy news with a hard fall on the Shanghai exchange from November levels and you get more than a 13% gain in the EWT Taiwan ETF from February 25 to March 24, compared to a 12% drop in the FXI, as we see in the chart below.

ishares china fund comparison

The Greater China Dragon Has Many Heads

If you’ve ever been to a Chinese New Year celebration, you know that the long, decorated dragon you see winding its way down the street is actually at least a dozen people meandering in unison. From year to year, a different person may take the lead.

So goes with Greater China, as Taiwan steps to the front and guides Singapore, Hong Kong, and even the Beijing behemoth across the Taiwan Straits into this week’s market action. The iShares MSCI Singapore Index Fund (NYSE:EWS) also jumped Monday on Taiwan’s election news, leaving its Hong Kong counterpart (NYSE:EWH) in the dust by quadrupling Hong Kong’s mid-day gain of 2% with an 8% bounce.

Taiwan’s China Post newspaper reported a 6.8% jump in the Taiwan Stock Exchange’s tourism sub-index on Monday as investors anticipate an influx of mainland Chinese to the capital Taipei and elsewhere on the island.

International traders who added EWT to their portfolio ahead of the election are also benefiting from currency tailwinds, as the Taiwanese dollar has appreciated to its highest level in a decade, pushing Taiwanese auto stocks up nearly 7% as well, and other export-based industries are sure to get a boost.

I’m long on the EWT ETF as Taiwanese stocks get a "peace pop" from Ma’s new leadership and re-establish themselves as a fruitful and less volatile counterpart to Shanghai stocks. We’ll be coming out with more specific plays on Greater China soon in Wealth Daily, so stay tuned.



Sam Hopkins