ETFs: A Play on Asia

09/23/2005 12:00 am EST

Focus:

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

Doug Fabian has long been known as a leading expert on mutual funds. In keeping with the times, he has also developed a leading expertise in exchange traded funds. Here, he looks at ETFs, and their use as vehicles to invest in both Japan and  China.

"There are challenges, as well as potential enormous upside, by investing in China," says Doug Fabian in Successful Investing, a service devoted to long-term portfolio development. "China is the world’s biggest consumer of aluminum, steel, copper, and coal. It’s the world’s second-biggest consumer of oil. Now there are professionals, economists and, of course, politicians who want you to be frightened by China’s growth,. But I look at China for what I think it really represents to the individual investor: a great opportunity.

"Given China’s voracious appetite for commodities, it only makes sense that those supplying the hungry dragon with the raw materials she requires to continue her high-level of industrial output would be the ones that are profiting most. That is why we developed our ‘buy what China buys’ strategy, as we want to position ourselves to profit from the companies, and countries, that are supplying China’s near-insatiable appetite for basic materials.

"This indirect approach to investing in China provides us with the desired exposure to the country’s boom, without the undesirable exposure to the caprice of China’s State Owned Enterprises, i.e., companies operated and controlled by the Chinese government. We’ve already begun implementing this strategy in our international ETF allocations. We are currently recommending two country-specific ETFs, the iShares MSCI Australia Index (EWA ASE), and the iShares MSCI Canada Index (EWC ASE), if you are able to use ETFs in your international allocations.

"In addition, there are several other ETFs we are considering, although we are not yet recommending them for purchase. One of China’s closest neighbors, South Korea, is the key economic hub of Northeast Asia, as it is strategically located between the large markets of China and Japan. The iShares MSCI South Korea Index Fund (EWY ASE) is an easy way to participate in China’s boom, and it is one of my favorite Asian ETFs. The iShares MSCI Hong Kong Index (EWH ASE) is also on my radar. This ETF has sizeable exposure to real estate, utilities and banking, all hot sectors relating to China’s rapid growth."

In his VIP Investor, a high-risk trading service, Fabian adds, "We are allocating our VIP portfolio to the  iShares MSCI Japan Index (EWJ ASE). This Japan-specific exchange traded fund seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the Japanese market, as measured by the MSCI Japan Index. The fund normally invests in stocks that are primarily traded on the Tokyo Stock Exchange, using a sampling strategy to try to track its index.

"In a sign that Japan's economic recovery is for real, its pace of growth in the second quarter nearly tripled the initial estimate (3.1% instead of 1.1%). Much of the growth is being fueled by consumer and capital spending. In fact, it is the first time since 1991 that exports and government money aren't the impetus for recovery. In addition,  Japan is politically stable. The outcome of the recent election should attract foreign and domestic investors who haven't yet participated in Japan's bull market. The day following the election, the Nikkei 225 Average rose to a new four-year high. So things in Japan are looking up and this bodes well for our position in EWJ."

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