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China Driving Fate Of ETFs

By Kevin Grewal

When it comes to the global economy, China continues to be the talk of the town.  To take it a step further, the nation, expected to witness the largest economic growth in 2010, is said to be driving the fate of exchange traded funds (ETFs).

According to a recent Securities and Commission filing by the Chinese Investment Corporation (CIC), the sovereign wealth fund holds north of $9 billion in U.S. equity investments.  The detailed filing further indicates the following allocations:

  • $254 million to the iShares S&P Global Materials (MXI)
  • $235 million to the Select Sector SPDR TR SBI Int Energy (XLE)
  • $207 million to the iShares MSCI EAFE Index (EFA), which holds BHP Billiton (BHP) as one of its top holdings.
  • $156 million to the SPDR Gold Trust (GLD)
  • $116 million to the Market Vectors Gold Miners ETF (GDX)
  • $107 million to the iShares S&P Global Energy (IXC)
  • $83 million to the Materials Select Sector SPDR (XLB)
  • $79 million to the U.S. Oil Fund (USO)

In addition to these allocations, the CIC has allocated $6.2 million to Anadarko Petroleum (APC), and $5.2 million to Chesapeake Energy (CHK), which are holdings in XLE and IXC and indirectly influence their performance.

Aggregately, CIC has invested nearly $420 million in energy based ETFs and nearly $450 million to ETFs that track metals and mining companies.  Both of these commodity based sectors are highly valuable to China in that the nation’s appetite for foreign oil and materials is likely to increase pushing up demand for both. 

China is selling US Treasuries and using these proceeds to reinvest in dollar-denominated securities via ETFs, making the nation’s sovereign wealth fund a major player in the ETF landscape.

With over $2 trillion in foreign currency reserves, China is likely to continue this trend of buying ETFs due to their vested interest alone being the driving force behind these appreciating equities.

An opportunity in these aforementioned ETFs exists; however, it is equally important to consider the inherent risks that they carry.  A good way to mitigate these risks is through the implementation of an exit strategy which triggers price points at which an upward trend could potentially be coming to an end and enable one to preserve equity.  Such a strategy can be found at www.SmartStops.net

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