Posted By: Ron Rowland

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Right now, China is celebrating 60 years of Communist party rule. Most of the party-goers arent old enough to remember anything else, of course, but that isnt stopping the nationwide festivities.

The sheer scale of China is mind-boggling! Just think about it

1.3 billion people — more than 4x the U.S. population

3.7 million square miles

And borders that touch 14 other nations!

Back in the 1970s, the Chinese government figured out that the whole central planning thing wasnt working so well. And communist ideology gave way to a pragmatic mix of state ownership and entrepreneurial capitalism.

It worked  Chinas economy is now 70 times bigger than it was in 1978, when the economic liberation began. Depending on how you calculate, China is either the second or third largest economy in the world!

The vast industrial base, concentrated in the coastal regions, is transforming China. Farm workers from the massive interior are drawn by the relative high pay of factories. New cities spring up out of nowhere to house these workers and provide for their needs

And now many of the products that were once immediately shipped to the U.S. or Europe are staying at home, snapped up by Chinas newly-prosperous middle class.

A middle class in a communist society? Hard to believe, yes, but there really is such a thing in China now. And theres an entire younger generation that now knows what theyre missing — and theyre working hard to reach the next level.

So if long-term rewards are what youre looking for, China represents an amazing investment opportunity. But how do you play it?

First, recognize that anything China-related is going to be a roller-coaster ride, just as it has been the last few years. Therefore dont invest unless youre prepared for the bumps and jerks.

Second, know how much risk youre taking. Individual Chinese stocks can deliver amazing profits, but they can be hard to trade. Thats why I think exchange traded funds (ETFs) are the best way for most investors to get involved in Chinas hot market. And you have several choices — some diversified, some more specialized.

Heres a quick summary:

Broad-Based China ETFs

U.S. investors can pick from four ETFs that track diversified Chinese stock market indexes:

iShares FTSE China Index Fund (FCHI)

iShares FTSE/Xinhua China 25 Index Fund (FXI)

SPDR S&P China (GXC)

PowerShares Golden Dragon Halter USX China Portfolio (PGJ)

Each of these ETFs takes a slightly different approach to constructing a China portfolio. FXI holds the 25 largest Hong Kong-listed companies that are available to foreigners. FCHI and GXC are similar but add some mid-cap stocks to the mix. Theyre a little more diversified than FXI. All three are capitalization-weighted.

PGJ takes a somewhat different tack. First, it includes only Chinese stocks that have a listing on U.S. exchanges. Second, PGJ uses a tiered-weighting method, which results in the sector mix being a little different from the others.

Specialized China ETFs

If you want to get a little more aggressive, Claymore offers two China ETFs that have a tighter focus:

Claymore/AlphaShares China Small Cap Index ETF (HAO)

Claymore/AlphaShares China Real Estate ETF (TAO)

HAO is a good way to get exposure to small, fast-growing Chinese companies. These stocks tend to be less dependent on exports and more related to Chinas domestic economy. TAO gives you an opportunity to profit from Chinas real estate and construction boom.

Inverse and Leveraged China ETFs

What if you think that Chinas stock market has gone up too far, too fast, and is due for a quick drop? You may still be able to profit with ProShares UltraShort FTSE/Xinhua China 25 (FXP). This is a 2x leveraged inverse ETF. For instance, on a day when the underlying index goes down 2 percent, FXP is calibrated to move twice as much in the other direction — up 4 percent in this example.

On the other hand, if youre bullish on the Chinese market, theres the ProShares Ultra FTSE/Xinhua China 25 (XPP). This 2x leveraged bullish fund aims to give twice the daily move in the same direction.

The leverage factor for ETFs like these is reset daily, so the 2x math doesnt always work for periods longer than a day. In other words, FXP and XPP are best used as tools by short-term traders, but if your timing is right you can make big profits from them.

Chinese Currency ETFs

If you want to bet on Chinas currency, the renminbi (also called the yuan), you can do it with these two instruments:

Market Vectors Chinese Renminbi/USD ETN (CNY)

WisdomTree Dreyfus Chinese Yuan Fund (CYB)

Theres one key difference between the CNY and the CYB: CNY is actually an exchange traded note (ETN), not an ETF. Practically speaking, ETNs work much the same way as ETFs, but theyre actually a form of debt instrument. I wrote about the unique risks of ETNs earlier this year in my Money and Markets column.

Chinese law prevents the funds from directly investing in the renminbi, so they hold currency derivatives known as nondeliverable forwards. These are similar to futures contracts, which reflect a markets expectations. As a result, these funds might not perfectly track the yuan.

As you can tell, there are plenty of ways to invest in Chinas stunning growth story. Ive only covered a few of them here, and ETF sponsors are planning many more. Do your research first, but dont overlook China. The opportunity is too big to pass up!

Best wishes,

Ron

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