ETFs may have been one of the more convenient tools to get in on the China boom, but the threat of monetary tightening in the country puts at risk some of the emerging market portion of many investor’s portfolios.
Already, major Chinese ETFs have fallen in response to the tightening threat.
iShares/FTSE Xinhua China 25 Index Fund FXI (blue), SPDR S&P China ETF GXC (gold), and iShares MSCI Hong Kong Index Fund EWH (red).
The three month run-up to today has been outstanding though, as evidenced in this chart. Part of that bullishness may be due to the market front-running quantitative easing 2, which sent cash into emerging markets chasing yield.
Now that QE2 is in place, a lot of the confidence has seeped out of the market. The threat of interest rate tightening led Chinese stocks to collapse last week.
But this might only be the beginning of the pain your ETF portfolio has experienced if you’re fully focused in on China.
According to Jim Farrish, the dramatic fall in the Powershares Commodities Index (DBC) is a response to the Chinese tightening story. It might seem as if commodities were a means to diversify your ETF portfolio, but actually they follow the same growth story China has and, therefore, only experienced similar falls to Chinese equities last week.