Two Alternatives to Shanghai

06/22/2010 12:47 pm EST


Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

Taiwan small caps offer entrée to a fast-growing high-tech economy on China’s doorstep, while Vietnam is a cheaper manufacturing base, writes Carlton Delfeld in Around the World with

The number of small cap country ETFs is exploding: the Market Vectors LatAm Small-Cap Index ETF (NYSE: LATM), the IQ South Korea Small Cap ETF (NYSE: SKOR), the IQ Canada Small Cap ETF (NYSE: CNDA), the Claymore/AlphaShares China Small Cap (NYSE: HAO), the iShares MSCI Japan Small Cap Index (NYSE: SCJ), and now one for Taiwan.

IndexIQ [recently] announced the launch of the IQ Taiwan Small Cap ETF (NYSE: TWON), the firm’s fourth product focusing on international small-cap stocks. TWON will track the IQ Taiwan Small Cap Index, a cap-weighted benchmark that includes small cap companies domiciled and primarily listed on stock exchanges in Taiwan. The underlying index consists of approximately 100 securities with a weighted average market capitalization of less than $500 million. Like other funds offering exposure to Taiwan’s equity markets, TWON will have a heavy tilt towards tech firms; the technology sector makes up about 30% of assets, followed by industrials (28%) and materials (18%).

Taiwan’s economy may have expanded at its fastest rate in 20 years in the first quarter of 2010, driven by strong exports and direct access to the mainland Chinese market. Taiwan’s economy has really made it a developed country, though it remains in the MSCI emerging market index. The mega cap-dominated country ETFs such as the iShares MSCI Taiwan Index ETF (NYSE: EWT) tend to be less of a pure play on the local economy and much more of a play on global growth in certain sectors.

Adam Patti, chief executive officer at IndexIQ, believes that small capitalization companies provide one of the best vehicles for investors seeking to build exposure to the guts of an emerging market economy. The risk is high; I suggest an [8%] trailing stop loss

I have added Market Vectors Vietnam ETF (VNM) this week to [the recommended international portfolio]. Not my favorite country by a long shot, but it is a big beneficiary from companies moving/diversifying manufacturing out of China. I recently went to Wal-Mart to purchase a basketball (they last about a month at our house); the price was only $4—made in Vietnam.

[Less cheap is] the Agricultural Bank of China, [which] has 350 million clients and plans to raise big bucks through an [initial public offering] on the Hong Kong and Shanghai exchanges. The valuation of between 1.5x and 2x book value may be too high. Chinese bank lending of $585 billion in the first six months of the year, coincidentally identical to the government’s fiscal stimulus, on top of $1.4 trillion last year, will come back to haunt Chinese lenders as surely as it did their Japanese peers before.

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