In The News
Second China ETF launches
12/16/2004
By ETFzone Staff
A second China ETF entered the market last week with a decidedly different tack. PowerShares Golden Dragon Halter USX China Portfolio (AMEX:PGJ - News) exclusively follows Chinese companies trading on US exchanges as opposed to Shanghai or Hong Kong exchanges.
As a result, PGJ's managers needn't bother with currency exchange, inefficient capital markets, or confusing foreign government regulations. Buying and selling of stock for the fund occurs within the US, in dollars, and with SEC oversight. This lowers costs for the fund, claims Bruce Bond, President and CEO of PowerShares Capital Management LLC. "From a product standpoint, because the money and securities all reside in one marketplace, we think we can provide better performance because we can track an index more closely," he said. "We reduce the overall cost for a foreign investor to participate in China." The fund's fees are capped at 0.6%, an aggressive rate for an emerging market fund. An added benefit of US regulatory oversight is comfort that transparent accounting and modern governance practices are likely to prevail.
PowerShares Golden Dragon contains many ADR (American Depository Receipts), or mirror versions shares traded primarily in China, but some are also "direct-listed", or firms which have decided to list in US exchanges despite doing most of their business in China:
| Component Company Type |
Explanation |
% of Fund |
| Red Chip: |
Companies controlled by Chinese government, traded in Hong Kong (ADRs) |
8% |
| H |
Non-government controlled companies traded in Hong Kong (ADRs) |
42% |
| Direct listed |
Chinese-based companies traded primarily in US |
42% |
| US Companies |
Focusing on Chinese trade, typically import/export houses |
8% |
The direct listed companies are often the most exciting, says Bond. "What that means is that companies in China which derive all or a majority of their revenues there leave China and come to list in the US to take advantage of our markets and capital structure," he said. "The ADRs tend to be state owned companies that are owned by the government. What people really want access to is the entrepreneurial emerging economy of China being built on infrastructure there today." The fund has a healthy dose of information technology high flyers, telecom firms, and consumer discretionary companies.
At an average Price/Equity ratio of 22 and Price/Book of 3, GPJ's valuations are higher than most emerging markets but modest for high growth asset classes. GPJ's underlying index has returned 36% over three years compared to 6% for the international bellwether index MSCI EAFE or compared to the S&P's 4%. While its volatility lately has been high, much of this is due to occasional leaps in value, which not all investors would equate with genuine risk. Its average market capitalization is a sizable $12 billion, but in addition to large cap firms it contains a smattering of mid cap, and nearly a third of the component companies are small cap. Both value and growth segments are covered for all sizes of companies.
PGJ makes a distinct contrast with iShares FTSE/Xinhua China 25 Index Fund (NYSE:FXI - News), which began trading in October. FXI contains the largest 25 Chinese companies in China or Hong Kong. FXI is probably a better representation of the China's large cap asset class.
The underlying index behind PGJ, the Halter USX China Index, is overseen by Halter Financial Group, an intriguing Dallas-based investment banking group. Halter specializes in the niche of reverse mergers, in which private companies become publicly traded without necessarily raising new capital as in an initial public offering (IPO). Halter has brought many Chinese firms into public markets, including some of those direct-listed in the US.
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