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Why ETF Investors Have a China Problem

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Why ETF Investors Have a China Problem

Trade war adds some new twists

Investors clamored for years to get access to the China stock market. Now that they have that access, there could be an opposite problem. You see, the China stock market, as large as it is, offers a wide variety of ways for investors to participate. Now, China and the United States are locked in a trade dispute with no apparent quick-fix. Regardless of how that evolves, there will be opportunities to capitalize.

According to the U.S-China Economic and Security Review Commission (yes, that’s a thing), as of the end of February, there were 156 China-based companies whose stocks trade in the U.S. Those stocks were worth over $1 Trillion in market value. So, there are many ways to invest in China through individual stocks.

However, as more investors discover the pooled, diversified approach of using Exchange-Traded Funds (ETFs) to invest, the creators of ETF products have responded. There are many ETFs that allow you to invest in a slice of the Chinese economy. This might be of interest to investors with the stomach for the volatility that comes with what many still consider to be an emerging market, despite its size.

Below you see a chart of 4 China ETFs I picked out. The point to make here is that there are many varieties of “China” to consider. China A-shares are the ones that trade directly in the country, but many of those same businesses can be owned via investment on the U.S. market, Hong Kong or elsewhere. As the chart shows, performance can vary widely.

China ETFs are not created equal

What’s an investor to do? First, as with any part of your portfolio, develop a game plan for how you might invest in China. In other words, determine if you are trying to profit from a positive outcome in the trade war for China, the U.S., and the rest of the globe. Or, do you want to try to profit from siding with whomever the markets ultimately decide is the winner.

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Then, determine how much volatility you are willing to put up with as the economic posturing in Washington and Beijing plays out. As you can see from this very partial sampling, there are many ways to slice this market. Furthermore, there may be less-obvious ways to participate in the ongoing trade war saga. For instance, if China and the U.S. are not playing their historical roles in global trade, which companies and countries pick up the slack? Or, does it turn out to be a case where everyone loses, and the opportunity in the stock market is limited. In that situation, there may be flight-to-safety alternatives such as U.S. Treasury securities, gold and foreign currencies.

The key to all of this, as usual, is to not make any decisions in isolation. That is, every move in your portfolio should be connected to the ultimate objectives you have, whatever they are. That’s investing. Anything else is just speculation.

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