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Five smart ways to invest in China

There are five easy ways to invest in the Chinese market, and all of them have yielded good to tremendous results in the past year, this week's decline notwithstanding. A look at each of the five, from riskiest to least risky:

1. Individual chinese stocks

Buying Chinese stocks is easier than it seems -- just focus on the 70 or so Chinese companies that trade on U.S. stock exchanges as American depositary receipts. ADRs are an Americanized version of a foreign stock and they trade like any other equity.

A complete list of Chinese ADRs is available on a website called adr.com, operated by investment firm JPMorgan. Look for stars like China Mobile, the world's largest cellular phone operator as measured by market value. Shares of China Mobile are up about 87 per cent in the past year.

Oil giant PetroChina is another ADR stock on the radar with a 14-per-cent gain in the past 12 months. The biggest percentage loser among Chinese ADRs on Tuesday was Trina Solar, a manufacturer of solar power modules that lost 13 per cent of its value, but still posts a one-year gain of about 122 per cent.

2. China-focused exchange-traded funds

One of the most popular China investments right now is an ETF called the iShares FTSE/Xinhua China 25 Index Fund. Think of this ETF as a play on Chinese "blue chips" through its holdings in 25 of the largest, most liquid Chinese companies that are open to foreign investors. Top holdings include both PetroChina and China Mobile.

Investors can buy the iShares China 25 fund like any stock -- it's listed on the NYSE under the symbol FXI.

Another China ETF, the PowerShares Golden Dragon Halter USX China Portfolio, invests in U.S.-listed companies that get most of their revenue from China. This fund is less popular than the iShares fund as judged by typical daily trading volumes and market capitalization, which is the number of shares outstanding multiplied by the share price.

3. China-focused closed-end funds

Closed-end funds are an obscure but well-established way to play the market in China. Think of a closed-end fund as a conventional mutual fund that trades like a stock. Whereas ETFs simply mirror stock indexes, closed-end funds have a manager to select individual stocks.

Four NYSE-listed closed-end funds that specialize in the Chinese market are China Fund, The Greater China Fund, the JF China Region Fund and Templeton Dragon. Performance varies widely -- Templeton Dragon made just 4 per cent in the past year, while Greater China Fund made 36.4 per cent.

Smart investors buy closed-end funds when trading at a discount (which means the share price is below the net asset value per share) and avoid buying funds trading at a premium. The Closed-End Fund Association website cefa.com can track whether funds are trading at a discount or premium. 4. China mutual funds

A couple of China mutual funds have been available to investors since the 1990s, but the category has recently expanded to 10 or so offerings. China funds can be quite expensive to own but have delivered some excellent returns lately.

A good example is the Excel China Fund, which has a 3.96-per-cent management expense ratio but also a one-year return of about 69 per cent. Manulife Financial's MIX China Opportunities Class has a much lower MER of 2.88 per cent, and it had a one-year return of 53.7 per cent. AGF China Focus Class dates back to 1994 and its zig-zagging results over the years show the ups and downs of investing in the Chinese market. There were gains of 67.6 per cent in 2006 and 63.4 per cent 2003, but also losses of 11 per cent in 2002 and 9.3 per cent in 2004. Since inception, this fund has a compound average annual return of 6.9 per cent.

5. Emerging market funds that include China

This type of fund is generally known by the term BRIC, for Brazil, Russia, India and China. These four countries have been identified as being among the most dynamic emerging markets, and bundling the four together offers a measure of diversification.

Mutual fund company Franklin Templeton had one of the first BRIC funds, and its one-year return of 36 per cent looks quite good. An alternative is the Claymore BRIC ETF, too new to have a one-year track record. The Templeton fund has held up with the past week's volatility, but the BRIC ETF has a big edge when it comes to ownership costs.

A twist on the BRIC concept is the Chindia Fund from Excel Funds Management, which invests in companies in China and India, as well as Hong Kong, Taiwan and other Far East countries. This fund racked up a one-year gain of about 43 per cent.

© 2007 The Globe and Mail. All rights reserved.

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