ETF Expert

Investing in China has been described as requiring "white knuckles" and "nerves of steel." For those who have had the fortitude and/or fearlessness, the rewards have been quite handsome.

The iShares FTSE/Xinhua China 25 Index Fund (FXI) has garnered nearly 300% in 3 years. That’s an incredible, portfolio delight by any investing standard.

Of course, for better or worse, it is quite reminiscent of the late 90s. The Nasdaq was unstoppable. Even 30%+ pullbacks were merely buying opportunities for the Nasdaq 100 Trust (QQQQ).

So today, what’s an 8%-10% drop on the iShares FTSE/Xinhua China 25 Index Fund (FXI)? We’ve seen pullbacks of 20%+ at least 3 times since 2005. No sweat… right?

Many thought "tech" was invincible for the new millennium. The 2000-2002 bear proved that it wasn’t. Many believed that real estate had entered a new valuation paradigm in this decade. The 2007 "situation" with real estate has shown once again… bubbles always deflate.

So now, the 21st century’s likely economic leader has a stock market that is overvalued by conventional standards. And while we cannot apply conventional wisdom to the Chinese market entirely… heck, the market keeps going up… we still need to be mindful of a likely day of reckoning.

Warren Buffet believes that valuations are too expensive on the mainland. He has sold a large stake in PetroChina. Alan Greenspan has been talking about irrational exuberance in China for months. He’s not always right… but he sees the same "greed" factor taking a foothold in the Great Wall.

Me? It’s little more than a prediction, yet… the iShares FTSE/Xinhua China 25 Index Fund (FXI) will probably see a 50% pullback within the next 12-18 months. That is the buying opportunity I would wait for.

Of course, there are other ways to prosper from international growth in Asia right now. South Korea, either through the iShares MSCI Emerging Markets Index (EEM) or in the politically risky, single-country Korea Index Fund (EWY), has superior fundamentals.

I’m also partial to the iShares Taiwan Index Fund (EWT). After all, the Republic of China known as Taiwan has the stability of a long-standing, nimble Democracy for 50+ years. And still, it scores emerging market-like growth, particularly in the tech space.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.