How to Lock In China's Potential

At my firm, we regularly invest in international markets -- both emerging and developed countries. We most often use two ETFs: the iShares Emerging Markets Index

and the iShares MSCI Index

. We use these because they both offer strong options markets, making hedging an easier mechanism to deploy. However, some specific country and regional ETFs have grown nicely in the last few years, and with that a robust options market has followed. In particular, I have my eye on a China ETF: the iShares FTSE China 25 Index

. It has a solid options market with good volume and reasonable bid/ask spreads. So, the question is: Would we rotate a small to medium amount of our existing international exposure into this kind of China fund? The result would be continuing international exposure with a concentration in China. I think the answer is yes, with a caveat. I like China for its 10- to 20-year potential. It still has an amazing growth trajectory as the country's middle class gets re-made over and over again. And some of the recent signs of growth in China are impressive. Asia Pacific now represents almost 26% of Apple's

total revenues, and the growth to that number is being driven by China. I think we are just scratching the surface on the purchasing power of the Chinese middle and upper-middle classes. China ETFs have had a little pullback recently. I like this pullback as a potential entry point. ETFs like FXI and iShares MSCI Hong Kong Index

have pulled back 5-6% from their March highs. They are also a good 15-20% below their highs in 2011. However, they are all more than 10% above their 2011 lows. The China ETFs have had quite a ride. Here is the caveat: I wouldn't blame anyone that wanted to wait and see if these ETFs pull back even further. But they are square in the middle of my watch list as a potential rotation target for international exposure. In fact, legging into them slowly to take advantage of a potential pullback might be the way to play it. Either way, China is a smart concentration play for a portfolio that is committed to international exposure.