As the Chinese economy has grown into a colossus over the last decade, many investors in the US have sought ways to capitalize on China's strength.
Unfortunately, this has often proved difficult. Researching Chinese stocks listed in Hong Kong or the US can be tough for individual investors not fluent in Chinese corporate governance. China-centered mutual funds are comparatively few, perhaps because even big financial institutions can face significant costs in researching the relatively opaque Chinese market.
Now, though, US investors have a chance to vastly broaden their access to China. In early October, Barclays Global Investors started a fund that tracks the FTSE/Xinhua 25, an index of 25 companies in China that includes many of the country's largest businesses.
The Barclays fund is the first exchange-traded fund listed in the US to focus exclusively on Chinese companies. Called the iShares FTSE/Xinhua China 25, it is listed on the New York Stock Exchange under the symbol FXI.
Exchange-traded funds can be bought and sold continuously, in contrast to mutual funds, which are bought and sold at one price each trading day. As of Aug. 31, statistics from Morgan Stanley show, exchange-traded fund trading volumes worldwide had risen nearly 20 percent this year, and about 313 of them were listed on markets in the US and overseas, up from virtually none a decade ago.
Barclays, the world's largest provider of exchange-traded funds by assets under management, is on the tip of a trend. State Street Global Advisors, at No. 2 on the list, is working with the Shanghai stock exchange to create an ETF that will track 50 top Shanghai stocks. PowerShares Capital Management, an asset management firm based in Wheaton, Illinois, is also developing a fund focused on China, said Deborah Fuhr, executive director for ETF research at Morgan Stanley.
Specialists in exchange-traded funds expect demand for these issues to be strong.
"If you want to invest in China, even through Hong Kong, it can be difficult for retail investors, but now they can do so easily through an ETF listed on the NYSE," Fuhr said.
Still, buying a Chinese ETF entails significant risks. For ordinary investors, the new ETF "should be used sparingly at best," said Dan Culloton, a mutual fund analyst at Morningstar Inc who has studied the Barclays offering.
The Chinese ETF includes several important caveats, Culloton said. Systemic political and economic risk, unemployment, labor unrest and problems in the banking sector, for example, make Chinese markets extremely volatile.
What's more, he said, the Barclays offering will focus on a small number of stocks for an ETF. Among its biggest holdings are China Mobile, the cell phone company; PetroChina, the oil company; and China Telecom and China Life Insurance.
"You're not spreading out that concentration of stocks," he said. "Portfolios that hold large positions in individual stocks tend to be more volatile."
Culloton notes that the Barclays fund is also focused on a small number of sectors, like natural resources and telecommunications. That could add to volatility.
But for an investor whose holdings are already diversified, a portfolio of Chinese stocks may make sense if it is kept to a small part of total assets. And a Chinese ETF offers some advantages for investors over picking Chinese stocks by themselves, or choosing an actively managed mutual fund with a focus on China.
"You can move in and out of an ETF as you want if you want to overweight China," without redemption fees, said Brad Durham, managing director of Emerging Portfolio Fund Research.
"If, oh my God, the Chinese government is rattling their sabers over invading Taiwan, let's get out," he said.
Exchange-traded funds, which track indexes, also have lower expenses than China-centered mutual funds run by active managers. Barclays says its fund will have an expense ratio of 0.74 percent; Culloton noted that expenses averaged 2.2 percent for actively managed funds focusing on Asia, excluding Japan.
As a result, Fuhr said, an ETF may prove valuable to some investors.
"It's for investors more likely to want to make decisions themselves," she said.
Jim Pacetti, head of ETF International, a consulting firm, added that previous exchange-traded funds focused on Taiwanese and Indian indexes have sold well with individual investors. Lee Kranefuss, chief executive of iShares, the part of Barclays Global responsible for ETFs, said he expected demand for the Barclays offering to be split roughly equally among retail and institutional investors.
"When you look at the longer-term future, the growth rates, China is a good broad play," Durham said. "You can get a lot of short-term factors dead wrong and if you're in the China market for a long time, you'll do well."