Building a Country Exposure

I write a lot of posts about building narrow exposures in portfolios and also about avoiding parts of the market that seem like blatant trouble spots. Obviously with a portfolio of individual stocks it is easy for a do it yourselfer to pick specific names to put in a portfolio in such a way as to avoid whatever he wants to avoid and capture whatever he wants to capture (easy is a reference to the access not the analysis). Obviously not everyone wants stocks only, ETFs are a popular tool that can allow for implementing specific inclusions and exclusions for people who take the time to look under the hood and do a little spreadsheet work.

We can use China as an example. There are broad based funds like the iShares FTSE Xinhua 25 Index Fund (FXI) and several others but they are very heavy in financial stocks which I think are big trouble waiting to happen. Anyone agreeing with me on that but who wants China via funds needs to look at some of the narrower products out there.

Someone ok with energy exposure for example, could buy the Global X China Energy ETF (CHIE) and be done with it. Some portion of the energy allocation could go into this fund and be the total allocation to China. After all China’s energy consumption is going to increase. This is one part of the China market, there are others, where the money is going to be spent no matter what (does not make them immune to large declines).

Take a glance under the hood and you’ll see the big oil names and big coal names (if you think you want energy exposure in China then you should know these names) which makes plenty of sense. So far so good. But as you make your way down the list you will also see a couple of solar stocks. Actually you will see quite a few solar stocks; about 14% by my rough count. It is possible that money should be spent on solar energy but for now it does not have to be like with oil, coal and natural gas. The solar stocks also seem to have different volatility characteristics. The 14% could be enough to be a drag on the fund versus another way in to the sector.

Energy is not the only way in to China. Anyone who has studied the country could reasonably conclude there might be three or four ways in for them along with one or two they would avoid. For anyone wanting China I think energy is one way in, also infrastructure (think industrials and utilities) and consumer items (things that Chinese people buy with almost inelastic demand).

For a while we have owned the iShares Emerging Market Infrastructure Fund (EMIF) which has a 24% weight to China. Recently we added the Market Vectors Coal ETF (KOL) which has a 20% weight to China. The size of the two funds in the portfolio still leaves us underweight what would be a “normal” allocation to China but you can see where I am going. An increase in either fund obviously increases China’s weight as would adding something like the EG Shares Emerging Market Consumer ETF (ECON) which allocates 9% or the Global X China Consumer ETF (CHIQ). ECON would only increase the China exposure a little whereas CHIQ, being 100% China, could really increase the portfolio weight depending on how much was bought.

You may prefer other exposures for China of course, or none at all, but the idea of pulling a country exposure together via several, but different, segments of the market can be a good way to go for someone who is trying to manage their portfolio’s volatility.

About Roger Nusbaum 169 Articles

Roger Nusbaum is an Arizona-based financial advisor who builds and manages client portfolios using a mix of individual stocks and ETFs. Roger writes a popular blog, which focuses on risk management, foreign stocks, exchange traded funds, options etc.

Roger has been recognized by many in the investment management industry for his expertise in portfolio management. Roger has been regularly interviewed by the financial press, trade journals, and television news shows. He has also had numerous technical articles published and has been quoted in a number of professional trade journals, newspapers, and consumer finance magazines. He appears frequently on CNBC Asia as a market commentator.

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