Sector Rotation Idea: China

by Wayne Ferbert on April 26th, 2012

At Buy & Hedge, we regularly invest in International markets - both emerging and developed countries. We most often use two ETFs: EEM - the iShares Emerging Markets Index & EFA - the iShares MSCI Index. We use these because they both offer strong options markets - making hedging an easier mechanism to deploy.

However, some specific country and regional ETFs have grown nicely in the last few years - and with that growth has followed a robust options market. In particular, I have my eye on a China ETF that has a solid options market. The ETF is symbol FXI: iShares FTSE China 25 Index. It has a solid options market with good volume and reasonable bid/ask spreads. 

So, the question is: would we rotate a small to medium amount of our EXISTING International exposure in to this kind of China fund? The result would be continuing International exposure - with a concentration in China.

I think the answer is yes - with a caveat. I like China for its 10-20 year potential. It still has an amazing growth trajectory as the country's middle class gets re-made over and over again. And some of the recent signs of growth in China are impressive. Asia Pacific now represents almost 26% of Apple's total revenues - and that growth to that number is being driven by China. I think we are just scratching the surface on the purchaing power of the Chinese middle and upper-middle class.

China ETFs have had a little pull back recently. I like this pull back as a potential entry point. ETFs like the FXI and EWH have pulled back 5-6% from their March highs. They are also a good 15-20% below their highs in 2011. However, they are all more than 10% above their 2011 lows. The China ETFs have had quite a ride.

Here is the caveat: I wouldn't blame anyone that wanted to wait and see if these ETFs pull back even further. But they are square in the middle of my watch list as a potential rotation target for International exposure. In fact, legging in to them slowly to take advantage of a potential pull back might be the way to play it. Either way, China is a smart concentration play for a potfolio that is committed to International exposure.


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