Comparing the New Claymore AlphaShares China All Cap ETF (YAO) to Claymore AlphaShares China Small Cap ETF (HAO)

There have been exciting new offerings in the international space of late, allowing US investors access to foreign equities other than those available as US ADRs.   We discussed a Brazilian small cap ETF last summer [Jun 2, 2009: Market Vectors Brazil Small Cap (BRF) - a New ETF for Exposure to Brazil, an Indian small cap product is on its way [Van Eck Global to Introduce Indian Small Cap Offering], and a Chinese small cap ETF, Claymore AlphaShares Small CAP (HAO) has been one of the better ETF performers in 2009.  We've had a limit order sitting out in this latter product for months, which I've recently canceled as I've "missed the train".

Even for someone who follows the markets daily there is an avalanche of ETF products out there, much of it "me too".  Hence if an ETF does not catch attention quickly it generally languishes in purgatory.  But Claymore has a new product out that fills a nice niche in between its small cap offering, and the very large cap type of ETFs, most notably the very popular iShares Xinhua China 25 (FXI) - a product we've owned on an off the past few years.  This is what I term a mega cap type of fund; it owns the largest of the large names in China - many of which are available in the US as ADRs.  The average market cap in this ETF is approaching $70B in size; quite large - but the top end names are some of the most highly valued companies in the world.

While China is an exception (to a degree) you generally will find more growth in mid or small cap names (but higher volatility) so I thought it would be interesting to compare and contrast the 2 Claymore products.  The small cap ETF is obvious in where it is placed in the food chain - but with the new all cap ETF you can get exposure from large companies, to medium, to small and this might turn out to be a very popular ETF over time for that reason.

First, let's review Claymore AlphaShares China Small Cap ETF (HAO) as its been around for a good while.  It's fund page can be found here.

The Claymore/AlphaShares China Small Cap Index ETF (the "Fund") seeks investment results that correspond generally to the performance, before the Fund’s fees and expenses, of an equity index called the AlphaShares China Small Cap Index (the “Index”). The Index is designed to measure and monitor the performance of the publicly-traded mainland China-based small capitalization companies.

The ETF has decent volume - trading about 300,000 shares a day, with an expense ratio of 0.70%.  The ETF has attracted about $250M in assets, and the year to date performance as of 10/31, was 76.1%.

Next we have the new Claymore AlphaShares China All Cap ETF (YAO) which launched in the past few weeks. 

The Claymore/AlphaShares China All-Cap ETF (the "Fund"), NYSE Arca:YAO, seeks investment results that correspond generally to the performance, before the Fund’s fees and expenses, of an equity index called the AlphaShares China All-Cap Index (the “China Index” or the “Index”).

The ETF actually had an amazing 1.3 million shares of volume the first day out - but has since fallen off.  It has not yet been around a month so we can't tell yet if momentum will continue; but it also has the same expense ratio as its smaller brother. It has already attracted $72M in assets in under a month, so it seems to be quite popular.

Now let's compare the ETFs, in terms of size of companies owned, number of companies owned, along with sector exposure

	HAO	YAO
# of Securities	135	99
Average Mkt Cap	$1.9 B	$18.4 B
Country Weights
China	71.2%	76.0%
Hong Kong	26.5%	23.4%
Top 5 Sectors
Industrials	22.9%	9.5%
IT	18.5%	11.6%
Consumer Disc	15.2%	-
Financials	14.8%	34.9%
Materials	12.4%	-
Energy	-	17.9%
Telecom	-	7.8%
(sector data as of 9/30)

We can see the All Cap offering owns companies on average 10x as large as the small cap offering; no surprise there.  This is still far smaller than the average size in the iShare Xinhau China 25 ETF referenced above.  Since most of China's largest companies are financial or energy based, this has also skewed YAO to a 1/3rd allocation into that 1 sector, with nearly another 1/5th into the energy sector.  We can see this in YAO's top holdings

1. Bank of China
2. China Life Insurance (LFC)
   
3. CNOOC (CEO)
4. Industrial Bank
5. China Construction Bank
6. PetroChina (PTR)
   
7. China Mobile (CHL)
   

Most of these (non bank) names are very familiar mega cap names for any investor who has traded Chinese shares in the US.  However these 7 make up "only" 35% of the All Cap ETF and then as you move down the list you start seeing more of a mix of names, both in size and industry. Hence the difference between this and FXI which is simply a collection of 25 names with the same girth as the 7 above.

Turning back to the Small Cap ETF, the top holdings are very different:

1. Citic Pacific
2. Netease.com (NTES)
3. Dongfeng Motor
4. Ctrip.com (CTRP)
5. Yanzhou Coal Mining (YZC)

These first five only make up 14% of the HAO ETF, so this is much more broadly diversified in both industry but also concentration of holdings.  I am familiar with a good portion of the names in this index - at least those listed in the US... certainly many names that are not available in the US also fill the roster.

So much like the Brazilian or coming Indian small cap ETFs we'd expect more volatility the smaller you go, but more of a real exposure to the domestic economy - especially the consumer.  Whereas the larger the ETF skews, the more exposure to multinational type of companies you would have.  But either way -  it is nice to begin to have more options.

3 minute video on the launch of Claymore AlphaShares China All Cap ETF (YAO) below







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