Whatever Happened to...The China Small-Cap ETF?

After enduring some wicked tumbles in 2011, it seems like ages ago that China ETFs were the toast of the emerging markets group. Truth be told, it was only last year that go-go times for investors looking for China exposure meant those investors could have picked nearly any China ETF and made a decent profit at some point in 2010. One of those funds was the Guggenheim China Small Cap ETF HAO, the big kahuna of China-specific small-cap ETFs. The Guggenheim China Small Cap ETF is nowhere near the size of the iShares FTSE China 25 Index Fund FXI, but it is also inaccurate to say HAO is an under the radar play. It isn't. HAO has frequently been touted as a better way of gaining exposure to China's allegedly growing middle class and as a way of dodging large-cap financials, a major component in FXI. That's all true, but those factors have made HAO no less vulnerable to China's scorched-earth monetary tightening regime that has inflicted serious damage on China-specific ETFs this year. Year-to-date HAO is down almost 30% while FXI is down about 12%. If you're looking for a silver lining, HAO has risen 5% in the past month, but still lags the 10% gain offered by FXI. Perhaps unknown to a lot of investors is the fact that HAO has a direct rival in the form of the iShares MSCI China Small-Cap Index Fund ECNS. While ECNS has a lower expense ratio (0.65% compared to 0.7% for HAO), the iShares offering has attracted just $20.2 million in assets under management since its debut in September 2010. HAO has over $170 million in AUM. Despite all the trials and tribulations, the HAO chart has started to improve recently and a solid move above $22 on strong volume could portend a run back to the 200-day line at $26, so there's decent upside here. Bull case: China needs to lead an emerging markets bounce and small-caps need to be embraced. Bear case: China continues monetary tightening and inflation there ebbs higher. Both scenarios combined would inflict more damage on all the ETFs mentioned here.