Chinese Small-Cap Fund Offers a Different Investing Angle

There’s a theory that small-cap funds outperform large-cap ones. One of the appeals for following this strategy in the U.S. market is an opportunity to beat institutional investors, such as mutual funds, which cannot invest in a small-capitalization company without making a public filing and disclosing the move to the rest of the investing world.

The lack of a long-term track record similar to the U.S. market prevents investors in Chinese equities from knowing if the same strategy can work there. Those willing to put the theory to the test can try the Guggenheim China Small Cap ETF (HAO).

HAO seeks to replicate the performance, before fees and expenses, of an index of mainland China-based companies that are open to foreign ownership with a float-adjusted market capitalization between US$250 million and US$1.5 billion. The fund’s investments take the form of common security equities that trade on major exchanges in Hong Kong or New York or consist of American Depository Receipts and similar instruments.

So far this year, the fund has gained 13.94% to outpace the projected growth of the Chinese economy as a whole, which is expected to reach approximately 7.5% in 2013. Last year, the fund rose 24.3%. The fund also offers a bit of income with a current yield of 1.22%.

The fund is better balanced by sector than some of the all-China or large-cap funds that I have featured in previous weeks. HAO has investments in industrials, 19.04%; consumer discretionary, 16.19%; financials, 14.56%; information technology, 14.43%; and materials, 11.23% — as well as allocations to consumer staples, health care, utilities, energy and telecommunication services.

The top 10 holdings comprise only 13.66% of the fund. The top five companies held are Youku Tudou, Inc., 2.10%; GCL-Poly Energy Holdings, Ltd., 1.42%; Tsingtao Brewery Co Ltd, 1.41%; BYD Co Ltd, 1.40%; and Haier Electronics Group Co, 1.35%.

Investing in small-cap funds in China lets you take advantage of the growing Chinese population, since small-capitalization companies are more likely to be focused on domestic consumers. At the same time, small-cap funds also are more likely to include small public companies founded by independent entrepreneurs, as opposed to quasi-governmental entities heavily represented in the large-cap and all-China funds. If small-cap investing in China appeals to you, you may want to check out the Guggenheim China Small Cap ETF (HAO).

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In case you missed them, check out my articles on Chinese ETFs from the last four weeks: PGJ, GXC, MCHI and FXI. I also invite you to comment in the space provided below.