China's Pollution Woes Could Boost These ETFs

It is a dilemma faced by many developing nations. How do economies keep developing without taking on a significant pollution footprint? With that in mind, it probably is not surprising that of the 10 most polluted places on earth all can be found in emerging markets.

Two Linfen and Tianying are in China. Neither of those places is Beijing, China's capital city, where a layer of smog so thick blanketed the city over the weekend that it essentially became unsafe to go outdoors.

An unofficial air quality monitor on the roof of the American Embassy in Beijing, the Air Quality Index on Saturday afternoon hit 886. Any figure above 300 is considered "hazardous," Sky News reported.

Still, the Shanghai Composite was up by more than three percent at 2AM Eastern time and it was health care and technology issues that lead the charge. Those sectors took on a leadership role in Monday's Asian session because traders speculated that those would be the industry groups most likely to benefit from government efforts to stem China's inflation. If that proves to be the case, the following ETFs could have upside potential.

EGShares Health Care GEMS ETF (NYSE:HGEM) The EGShares Health Care GEMS ETF is apt to put off volume fanatics because average turnover in this fund is less than 3,800 shares per day. That has not stopped HGEM from gaining almost 28 percent in the past year, a performance that reminds investors that while U.S.-based pharmaceuticals names are often slapped with the "low beta" tag, that is not the case in the developing world.

Said another way, the Health Care Select Sector SPDR (NYSE:XLV) has lagged HGEM by more than 700 basis points over the past year. HGEM devotes a little less than two-thirds of its weight to biotechnology and pharmaceuticals names with the remainder of the fund's weight going to health care equipment makers. Nearly 20.3 percent of HGEM's country weight is allocated to China, putting that country behind India (31 percent) and South Africa (27.6 percent).

Guggenheim China Small Cap (NYSE:HAO) There has been plenty of chatter about exactly which is the best China fund. It probably is not fair to compare a small-cap fund like HAO to the large- and mega-cap heavy iShares FTSE China 25 Index Fund (NYSE:FXI), but it is worth nothing that when Chinese stocks are rising, HAO is the better bet. HAO is up 9.8 percent in the past month while FXI is up 6.1 percent.

Combined, technology and health care names represent about 12 percent of HAO's weight, so this is not the purest play on China's efforts to tame pollution. HAO's valuation is compelling, though. The fund's P/E is 7.9 and it carries a price-to-book ratio of just one, according to Guggenheim data. FXI's P/E ratio is nearly 14 with a price-to-book of 1.73.

Guggenheim Solar ETF (NYSE:TAN) A major part of the Chinese pollution problem is the country's voracious consumption and production of coal as a fuel source. Conversely, China has also shown a deep commitment to its solar industry. That commitment has prompted a stunning rally in solar stocks and ETFs in recent weeks.

Soaring solar stocks have some doubters and detractors, but there is no denying the fact that the Guggenheim Solar ETF has gained almost 13 percent in the past month. Not only have TAN's constituents been on the move higher, but so has the ETF's assets under management total. In June 2012 TAN had just over $50 million in AUM. As of last Friday, that number was over $60.6 million.

TAN is not a China-specific play, but China and Hong Kong combine for almost 44 percent of the ETF's country weight.

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