This exchange traded fund’s large-cap holdings help it profit from Chinese growth

We think the long-term outlook for China — and Chinese stocks — is strong. That’s because the country’s huge population is generally younger than North Americans, and large numbers of Chinese have the potential to advance from poverty into the middle class.

(One of the best ways for investors to tap into Chinese growth is through low-fee exchange-traded funds. The iShares FTSE/Xinhua China 25 Index Fund is one example of an exchange traded fund that focuses on China. You can get our very latest buy/sell/hold advice on this fund in the latest issue of Canadian Wealth Advisor. See below for further details. )

Political instability still a danger to foreign investors in China

Even though China offers lots of growth potential, there are still risks involved in investing directly in Chinese stocks. One of the biggest risks is politics. China’s periodic leadership struggles can bring positive or negative changes for foreign investors. Inside China, there is unrest in rural areas, because farm workers are not joining fully in the growing prosperity in the cities. This unrest could spread to the unemployed and under-employed in China’s cities, destabilizing the political and social environment.

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As well, China is still in the early stages of establishing the rule of law, in which property rights are respected. Corporate governance is in its infancy, and control of corruption is sporadic. The political climate can change quickly in countries that do not have a tradition of the rule of law. When changes occur, you can bet that foreign investors will suffer more than the locals.

Exchange traded funds offer a low-cost, convenient way to access emerging markets

In light of these risks, we continue to recommend that you use caution when directly investing in emerging markets like China. We also think that low-fee exchange traded funds are one of the best ways for most investors to take advantage of the fast growth that these markets offer.

Exchange-traded funds mirror the performance of a stock-market index or sub-index. They hold a more-or-less fixed selection of securities that are chosen to represent the holdings that go into the calculation of the index or sub-index.

These funds trade on stock exchanges, just like stocks. Investors can buy them on margin or sell them short.

Here’s our latest analysis of a Chinese exchange-traded fund with strong growth potential

We’ve updated our buy/sell/hold advice on the iShares FTSE/Xinhua China 25 Index Fund in the latest Canadian Wealth Advisor.

The exchange-traded fund aims to track the FTSE/Xinhua China 25 Index, which is made up of the 25 largest and most liquid Chinese stocks. All of the stocks in the index trade on the Hong Kong exchange. Some also trade as American Depositary Receipts on the New York Stock Exchange.

The $7.6-billion fund’s top holdings are China Mobile, 10.4%; China Construction Bank, 9.5%; Industrial & Commercial Bank of China, 8.4%; China Life Insurance, 7.0%; Bank of China, 6.2%; China Merchants Bank, 4.2%; CNOOC Ltd., 4.2%; Ping An Insurance Group, 4.0%; China Petroleum & Chemical, 3.9%; and China Telecom, 3.9%.

The fund’s holdings give it the following industry breakdown: Financials (46.6%), Telecommunications (18.0%), Oil and Gas (12.0%), Basic Materials (11.1%), Industrials (8.8%), Utilities (1.9%) and Consumer Services (1.6%).

iShares FTSE/Xinhua China 25 Index Fund was launched on October 5, 2004. It trades at a 0.8% discount to its net asset value. The ETF has a 0.73% expense ratio. The dividend yield is 1.2%.

You can get our latest buy/sell/hold advice on iShares FTSE/Xinhua China 25 Index Fund in the latest Canadian Wealth Advisor newsletter. Click here to learn how you can get one month free when you subscribe today.