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Although growth in China has slowed, the fact remains that it is the fastest growing economy and the second-largest country in the world. According to IHS Global Insight, Chinas GDP is predicted to grow about 7.8% this year.

ETFs provide indexed, liquid exposure to China with low fees. However, they arent created equal and the tracking benchmarks have important differences that investors need to understand.

Comparing two popular ETFs for China is a good place to start.

The largest ETF to invest in China is the iShares FTSE China 25 Index Fund (NYSEArca: FXI )  which holds 26 stocks, mostly large-caps and state run mega-cap companies. About half of the fund is dedicated to the financial sector, which limits diversity. With $4.53 billion in assets under management, the fund is the largest ETF that invests in China. [ETF Chart of the Day: China ]

A smaller ETF with around 179 holdings is the SPDR S&P China ETF (NYSEArca: GXC )  with $783.8 million in assets. The fund is less expensive, with an expense ratio of 0.59%. GXC has outperformed FXI over the past year, over the past 5 years and year-to-date. [Domestic Consumption Slowdown Hits China ETFs ]

Which ETF makes the most sense may also depend on the investors views on certain key sectors. FXI largely invests in three sectors: Financials, Energy and Telecom Services, while GXC offers exposure to those three plus has significant stakes in Information Technology, Industrials and, to a lesser extent, Consumer Discretionary and Consumer Staples, Todd Rosenbluth, S&P analyst,  said in a recent note.

Over the past 6 months, GXC has lost about 6.5% compared to FXI that lost about 9.3%. The performance difference could be attributed to FXIs heavy concentration in the financial sector, and the small number of companies that are held. GXC does invest more heavily in consumer discretionary, a defensive play in uncertain market conditions.  [Oil ETFs Slip with China’s Growth ]

In the near future, the Chinese government is looking to cut back interest rates and loosen reserve requirements for banks to help the domestic economy. Alec Young, S&P Capital IQ Equity Strategist reports that more monetary and fiscal policy is due for the second half of 2012, making the outlook for Chinese equities positive.

Matt Hougan, president of ETF analytics for IndexUniverse, in a recent Forbes interview said he prefers GXC over FXI.

FXI has the bulk of the assets for ETF investing in China, he said. But the truth is: It does a terrible job capturing China. FXI has no exposure to technology and very little exposure to consumers. Eighty percent of the portfolio is invested in old-school, ex-government firms, with none of the entrepreneurial, middle-class-driven growth that most investors want from China.

Hougan added a fund like GXC gives you much better exposure, but investors don’t bother to look.

iShares FTSE China 25 Index Fund 

Tisha Guerrero contributed to this article. 

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.