China is one of the most tempting markets in the world but it also carries big risk. The country’s enormous population of more than 1.3 billion people and gross domestic product growth of close to 10% make it an appealing place to invest. However, it also is an emerging market that still operates under tight government control. For these reasons, it is somewhat of an investment enigma. Nonetheless, Market Vectors China ETF (PEK) is a new exchange-traded fund (ETF) that has been launched as a bullish play on China.

The fund seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the CSI 300 Index. That diversified index consists of 300 A-Share stocks listed on the Shenzen or Shanghai stock exchanges. The fund does not invest directly in A-Shares. Instead, it invests in swaps and other types of derivative instruments that have economic characteristics substantially identical to those of China A-Share stocks. By investing in swaps, the fund may need to reset its holdings on a regular basis and thereby increase the likelihood that it will produce short-term capital gains and/or ordinary income. That situation likely will cause higher taxes for the fund’s investors.

Another factor to consider is that China’s total equity market accounts for 33% of the emerging market universe, based on market capitalization. But the opportunity largely was inaccessible to non-Chinese investors who were prohibited by the Chinese government from buying A-Shares. Instead, only a small portion of Chinese equities were available to foreign investors through B-Shares, H-Shares, N-Shares, L-Shares, S-Shares and Red Chips. That subset of non-A-Shares is only 28% of China’s total equity market, based on market capitalization.

In recent years, the Chinese government has made an exception for foreign investors who are approved as Qualified Foreign Institutional Investors to access the A-Share market. The Market Vectors China ETF is the first U.S.-registered, open-end ETF to offer performance exposure to the local Chinese A-Share market. Many companies listed on the Shenzhen and Shanghai stock exchanges are not listed on other international exchanges. Thus, it has been difficult for U.S. and other foreign investors to access Chinese stocks that have been driving much of the market’s performance.

Since the new fund only began trading on Oct. 13, I am not ready to recommend it. I like to see a fund become established by generating a consistent 100,000 average daily trading volume to ensure it is liquid enough to buy and sell easily at a fair price when needed. But if you are an investor who has been frustrated in the past from an inability to access the A-Shares market in China, PEK now offers a way to do so.

If you want advice from me about which ETFs to buy and to sell, I encourage you to sign up for my ETF Trader service by clicking here. As always, I am pleased to answer any of your questions about ETFs, so do not hesitate to contact me if you have one. To send your question to me, simply click here. You may just see your question answered in a future ETF Talk.