When it comes to investing in China, many investors have overlooked a crucial opportunity when they should be allocating at least 9% of their portfolios to that emerging country, Princeton University economics professor Burton G. Malkiel told attendees at IMCA’s annual conference on Monday.

That comes as China, which was once the world’s largest economy in 1820, is poised to continue to capture a new resurgence. In the next decade, China will likely be the fastest growing major economy in the world, Malkiel said. By the end of this decade, China will likely be larger than the United States. Chinese stocks, known for their volatility, are also very reasonably priced currently, according to Malkiel.

“Most people, I believe, are underexposed to China,” Malkiel said. “I really do think you should ask yourself, just without making purchasing power adjustments, China is 9% to 10% of the world’s GDP. Do you really want your portfolios to be underexposed to the fastest growing economy in the world?”

Investors looking to gain exposure to China can follow three investment strategies, Malkiel said.

The first is to follow a pure indexing strategy. But because some of the major China equity indexes have poor coverage or do not have enough sector diversification, it is important to understand their flaws, Malkiel said.

The FTSE/Xinhua 25 stock index, the MSCI and the Hang Seng all do not include New York listings, which can prohibit investors from opportunities to invest in companies like web services company Baidu Inc. Those indices also predominantly focus on sectors including banking, oil and telecom, shutting other key areas like consumer and technology companies out.

Malkiel, who is also the chairman of the index committee at AlphaShares LLC, said that that company has put together its own index comprised of 200 companies, with more than 25% exposure to the consumer and technology industries. The company has also designed other specific ETFs targeting bonds, real estate and small cap investment opportunities in China.

The second strategy investors can leverage when investing in China is a hedged strategy that will take advantage of the higher levels of volatility that Chinese stocks have by using options.

The hedged strategy works with China by taking a long position by buying all of the stocks in an index, and subsequently taking a short position by writing one-month call options either at the money or a little bit above the money, Malkiel said. The money that comes from writing the call option is then reinvested in the stocks.

“During the financial crisis, we were able to write one month at the money options with a premium of 11% or 12%,” Malkiel said of the strategy. “Now, you would get 4 or 5% or 3 to 5% today because the volatility is a lot lower, but the strategy is then go long on the stocks.”

A third strategy targets investors who are not comfortable directly investing in China or Chinese companies. Those investors can instead invest with multinational companies that benefit from China’s growth, Malkiel said. That includes opportunities in sectors including industrial goods, consumer goods, luxury goods, commodities and natural resources.

Yum! Brands Inc., for example, is not currently doing well in the U.S., but has seen 20% growth, almost exclusively coming from Asia. That includes opening new stores at a clip of one to two per day in China for brands including KFC, Pizza Hut and Taco Bell.

Luxury brands like Louis Vuitton also outperform in China when compared to other areas like Europe when it comes to sales of its designer handbags. And this was still true before the recession in Europe, according to Malkiel.

“The growth of china has simply been absolutely remarkable. Nowhere in history have we seen a country grow this fast,” Malkiel said. “The question is is it going to continue or is it over? And I think it’s going to continue."

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