ECNS iShares MSCI China Small Cap

Although emerging markets have seen some shaky trading as of late, developing nations still offer up a compelling investment case. These nations generally have high growth rates, reasonable amounts of debt, and can often be uncorrelated to broader markets, a factor that could prove key given the woes in Europe.

In the emerging market space, China continues to dominate the discussion by a wide margin thanks to the massive size of the economy and the country’s exporting and resource consuming prowess. However, concerns are beginning to build over the future economic superpower as investors are starting to grow worried about a property bubble, leadership changes, and broad inflationary problems in the country.

Despite these concerns, China continues to plug along and its equity markets remain resilient even with the pessimism. In fact, broad Chinese markets are up on the year with the ultra-popular FXI adding nearly 15.5% in the first eight weeks of the year (Read What Bubble? China ETFs Soaring To Start 2012).  

However, the product has retreated significantly in the past few weeks as worries over Chinese demand have begun to build. As a result, FXI is now up just 7.4% for the year, representing a huge slump for the China ETF during March and early April (see more at the Zacks ETF Center).

Fortunately, all of the China ETF space hasn’t been as negatively impacted. The small cap China ETF space, for example, has managed to keep much of their gains from the first part of the year as both of the China small cap ETFs are still up more than 11.5% on the year. Given this outperformance, it may be worth it for investors to consider making an allocation to the space if they want to stay in China but do it with better performing funds.

Furthermore, investors should note the differences between the large cap focused FXI and the small cap ETFs targeting China. FXI actually only consists of five sectors with more than half the portfolio going to financials, 24% to energy, and 18% in telecom. As a result of this breakdown, investors could also be better served by looking at the small cap space as a way to achieve a more diversified look at the China market (read Forget FXI: Try These Three China ETFs Instead).

However, investors should note that there are a few stark differences between the two China small cap ETFs that are currently on the market. These differences, in terms of expenses, volume, and top holdings, could be the key factors for some investors in this uncertain market. Thanks to this, we have highlighted the two products in this space below along with a brief discussion of what investors can expect in each fund in this intriguing market segment:

 Guggenheim China Small Cap ETF (HAO)

This China small cap fund looks to follow the AlphaShares China Small Cap Index which looks at Chinese firms that have a maximum in $1.5 billion float-adjusted market capitalization. The product does have a decent component in firms based in Hong Kong, as these securities account for roughly one-fourth of the total.

The overall basket of securities in the fund consists of nearly 220 companies with industrials (26%), basic materials (14%), and consumer discretionary (14%), accounting for the top three spots. Mid caps do account for 58% of the portfolio while large caps make up another 4% of assets. This suggests that the product will not be a pure play on small caps but will still have a tilt towards pint sized securities.

Despite this and the expense ratio of 70 basis points, the ETF has seen a great deal of interest from investors as it has amassed over $170 million in AUM. It also doesn’t hurt that the average volume is over 110,000 shares a day and that the yield exceeds 2.8% (read Five ETFs to Buy in 2012).

iShares MSCI China Small Cap Index Fund (ECNS)

This relatively new product also looks to give investors exposure to the small cap China market, this time by tracking the MSCI China Small Cap Index Fund. This benchmark looks to measure the equity securities in the bottom 14% by market cap of the China market. This is represented by H-Share and B-Share stocks but it also includes Hong Kong listed stocks known as Red-Chips and P-Chips.

Overall, the fund contains just over 330 securities in its portfolio, putting under 15% of its assets in the top ten holdings. This ensures that company specific risk isn’t much of a problem for this fund. For sectors, consumer discretionary firms account for 19% of the assets, while industrials (18%), basic materials (15%), and tech (13%) round out the top four (see Three Great ETFs For Your IRA).

Due to being the second product in the space, this ETF has failed to attract a decent amount of interest from investors, having amassed assets of just $16 million and volume of 5,300 shares a day. Nevertheless, the lower expense ratio of 65 basis points and the solid dividend yield of 2.4% could make the product intriguing to some investors.

 

	ECNS	HAO
Expenses	0.65%	0.70%
Average Daily Trading Volume	5,400	114,000
Dividend	2.4%	2.8%
Assets in top 10 holdings	11.1%	12.7%
Total Holdings	326	224
Small Cap (or less) percentage	77%	37%

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