One of the main topics that I regularly write about is how un-diversified most people’s portfolios are. The main problem I see is that far too many Australians are invested in Australian-centric businesses, invariably the large caps like the big banks, Telstra Corporation Ltd (ASX: TLS), Wesfarmers Ltd (ASX: WES) and Woolworths Limited (ASX: WOW).
Diversifying your portfolio with ASX mid-caps and small caps is a good idea to counter this. An even better idea is to allocate some of your portfolio to the top American-based shares like Alphabet (Google), Facebook and the other tech giants.
However, there’s another segment of the world’s share market I think most investors need to start considering: China.
China’s economy has been growing spectacularly over the past two decade. There is a rapidly growing Chinese middle class. Reportedly there is, or will be soon, more Chinese middle class people than the whole of the US population. That is a huge potential market.
There are also a number of domestic Chinese businesses that are experiencing rapid growth. One of the best ways to access this is through UBS IQ Asia ETF or UBS IQ MSCI Asia APEX 50 Ethical ETF (ASX: UBP).
Here are some reasons why I like it:
This exchange-traded fund owns the 50 largest stocks in the Asia (excluding Japan) region represented in the MSCI AC Asia ex Japan Index.
Its holdings are spread across many different sectors, but the main two are information technology which is 50.8% of the ETF and financials which is 27.7% of the index.
It’s not too diversified in terms of country allocation, but for me the point of this ETF is to get exposure to these countries which are underrepresented in our portfolios. Around 49.1% of the ETF is allocated to China, 14.7% to Hong Kong, 18.8% to South Korea, 12.3% to Taiwan and 5.1% to Singapore.
The key reason why I’m interested in this ETF is that some of its top holdings are the most exciting Asian businesses. Tencent represents 12.8% of the ETF, Alibaba is 10.2%, Samsung is 10% and Baidu is 3%.
Arguably, these are Asia’s versions of Apple, Amazon, Facebook and Alphabet (Google).
I believe most of these shares have a lot further to run as the Chinese population becomes wealthier, spends more money and more time online.
It provides all this access to the Chinese share market for a management fee of only 0.45%, which is pretty good.
The Trump-inspired trade wars have had a negative effect on the underlying businesses in this index and therefore the index itself has fallen by 7% over the past two months.
The best time to be greedy is when others are fearful. I think the current climate could be a good time to start buying Chinese shares.
Despite the recent price decline the index has returned an average 25% per annum over the past two years.
I wouldn’t expect this type of performance every year but I do believe that Asia’s giants have further to run if China’s middle class continues to get wealthier.
Obviously there are risks to this ETF. It’s very China-focused. China is not known for being as ‘open’ to pure capitalism as western countries. The government could hurt any of the businesses or the Chinese economy could have a recession.
To mitigate this risk, I believe this ETF should be just one share as part of a diversified portfolio. That way each individual holding in the ETF will only be a small part of your overall portfolio and any downside will be limited.
The index may fall further in the near-term, but I think this is one of the best ways to get broad exposure to some of Asia’s biggest businesses. I’d be happy to buy a parcel today and add more as time goes on.
This top-quality Aussie share is looking to cash in on the Asian wealth boom by opening its first locations. It’s also predicting profit growth of 30% in FY18.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Blackmores Limited, Telstra Limited, and Wesfarmers Limited. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.