By Invest With An Edge. on October 2nd, 2010, 9:03 am in ETFs

The iShares MSCI China Small Cap Index Fund (ECNS) was launched September 29, 2010 with an objective of capturing the performance of China’s small cap stocks.  The underlying MSCI index is a free-float adjusted market capitalization weighted index designed to measure the performance of the bottom 14% (by market cap) of equities listed in China and Hong Kong.

According to the ECNS fact sheet (pdf), the index has 302 constituents and the fund currently holds 295 of them.  Holdings consist of 57% P-Chips. 17% Red-Chips. 15% H-Shares. and 11% B-Shares .  The largest holdings include Brilliance China Automotive 1.4%, Zhaojin Mining Industry-H 1.4%, China Gas Holdings 1.2%, Daphne International Holding 1.1%, and China Shanshui Cement Group 1.1%.

Sector breakdown for the index as of 8/31/10 was Consumer Discretionary 23.3%, Industrials 19.6%, Materials 15.2%, Financials 12.5%, Technology 11.3%, Consumer Staples 7.0%, Utilities 5.0%, Health Care 4.3%, and Energy 1.3%.  An expense ratio of 0.65% is indicated in the ECNS overview .

ECNS will compete with the more established Guggenheim China Small Cap ETF (HAO) (HAO overview page ).  HAO has gathered about $417 million in assets since its early 2008 introduction and has a slightly higher expense ratio of 0.70%.  The underlying index for HAO has about half the holdings at 156 and a drastically different sector profile.  Another significant difference is that HAO invests only in US-listed ADRs while ECNS takes the more direct approach.

Given the significant differences between ECNS and HAO, I expect performance might also exhibit large differences.  The extra coverage and diversification provided by ECNS makes it a better proxy for China small cap stocks.  The slight expense ratio advantage of ECNS is not likely to be a factor at this time, but the iShares brand name should definitely help.

Compared to other offerings, there appears to be no overlap between the holdings of ECNS and any of the popular China large cap ETFs: iShares FTSE/Xinhua China 25 (FXI) (FXI overview ), SPDR S&P China ETF (GXC) (GXC overview ), and iShares FTSE China (Hong Kong Listed) Index Fund (FCHI) (FCHI overview ).

Ron Rowland

Disclosure covering writer, editor, and publisher:  No positions in any of the securities mentioned.  No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.