IU.com: How much do you recommend is appropriate in China?

Carter: We'd say at least 5-10% of your total stock portfolio. If you're a growth investor, probably more.

IU.com: Isn't a small-cap Chinese ETF a pretty volatile fund?

Carter: Not particularly more volatile than other Chinese ETFs. If it's got China in the name, you're going to be seeing a fair amount of volatility no matter the size. And they've all had a tough year, whether they're large-cap or small-cap focused.

IU.com: What's the attraction of breaking the Chinese stock market up by size?

Carter: A couple of things. Smaller companies tend to have less government ownership. And they tend to be more entrepreneurial in nature. If you look at our small-cap index compared to the iShares FTSE/Xinhua China 25 Index (NYSEArca: FXI), it's a much broader index. FXI has 25 mega-cap stocks. The other ETF available, the SPDR S&P China (AMEX: GXC), includes all of the stocks in the market. But the mid-caps and small-caps get diluted. In most cases, the government owns most of the stocks in both FXI and GXC.

IU.com: How do you screen for small-caps in your ETF?

Carter: We screen for companies with market-caps of $200 million to $1.5 billion. Then we use liquidity screens. At the end of June, the index had 122 different stocks. Then, we weight each by market-cap size.

IU.com: How does the Chinese real estate market compare with other parts of the world?

Carter: It doesn't have a real estate investment trust structure. So there aren't any REITS like we see in the U.S. Basically, in China, they're mainly developers and management companies. Before building, they acquire land from the government by obtaining long-term leases. There are 40 or 50 different developers in our index and they're doing all sorts of projects. But the Chinese real estate market has slowed down this year along with the broader market. Interestingly enough, real estate prices haven't dropped nearly as much as the stock market. And it has a lower correlation with Chinese equities and U.S. equities. So we look at TAO as a diversification tool.

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