Dale Jackson

Personal Finance Columnist, Payback Time

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If you want a diversified investment portfolio you simply can’t avoid China.

Growth in the world’s most populace country may have slowed to the modest single-digits but the decades-long China growth story is far from over.

Big institutional investors have been flocking to China for nearly half a decade, but getting a piece of the action can be challenging for the average investor. Buying and selling Chinese stocks directly can be complicated, expensive and risky.

Owning China through mutual funds

Mutual funds are the most popular choice because many have the resources to be actively engaged in the Chinese market. Many have portfolio managers, sub-advisors or researchers on the ground in China.

That could bring up the cost for mutual fund investors in the form of higher fees, or management expense ratios. Annual fees range from 1.5 per cent to four per cent. The key is to find the best management, with the best track record, at the lowest cost.

Among mutual funds there are several ways to get exposure to China. Global, international, emerging market or Asia equity funds can choose which countries, and how much, to invest. If they feel there is more or less opportunity in China at any particular time, they can adjust the weighing in the Chinese market in relation to other countries within the fund’s mandate.

Chinese funds underperform benchmark

Funds that invest only in China limit an investor’s options to Chinese equities and – judging by recent returns – the ability to make money. The average Chinese equity fund available on the Canadian market has posted an annual return of five per cent over the past five years compared with a nine per cent annual return for their benchmark index.

In most cases, fees account for a large part of the shortfall. Bad management accounts for the rest.   

Buying China through ETFs

The best way to invest in China is through an experienced money manager but as the saying goes: if you want to play, you’ve got to pay.

A lower cost alternative is to purchase Chinese indices through exchange-traded funds. ETF fees are normally a fraction of a per cent of the amount invested but there is no portfolio manager to decide how much of the portfolio goes where.

There are many indices relating to China and therefore, many ETFs. There are also different methodologies. As an example, most ETFs are market weighted. That mean the biggest companies make up the biggest portion of the holdings. Alternatively, equal-weighted ETFs can give investors more exposure to smaller companies with more growth potential.

One China ETF popular with Canadians is iShares China Index (XCH-TSX). It is hedged to Canadian dollars and only trades Chinese stocks listed in Hong Kong – providing fewer restraints and more transparency.       

Dale Jackson is BNN's Personal Investor. Follow him on Twitter @DaleJacksonPI