When emerging markets stocks and exchange-traded funds (ETFs) stumbled in 2018, Chinese equities were among the most egregious offenders. This year, the reverse is true.
Year-to-date, the iShares MSCI China ETF (NASDAQ:MCHI) is up more than 15% while the MSCI Emerging Markets Index is higher by about almost 10%. Data out of the world’s second-largest economy supports the idea of embracing Chinese ETFs this year.
“We expect the Chinese economy to regain its footing in the first half of 2019, thanks to stimulus measures already in place and others expected to come,” said BlackRock in a recent note. “China’s policymakers are seeking to boost the economy through a range of channels, including tax cuts, injecting fresh liquidity via cuts to bank reserve requirements while relaxing macro-prudential measures aimed at limiting financial leverage.”
Signs are emerging that the U.S. is taking a softer tone on a long-running trade dispute with China and a thaw in those tensions is expected to be a significant catalyst for Chinese ETFs.
“Growth has slowed for two main reasons, in our view: policy-led constraints to clamp down on excessive credit expansion implemented in the past and much greater uncertainty arising from the U.S.-China trade dispute, especially for China’s key industrial sector,” according to BlackRock.
For investors searching for more upside in Chinese ETFs, it may pay to be more tactical at this point and consider some of these funds.
WisdomTree China ex-State-Owned Enterprises Fund (CXSE)
Expense Ratio: 0.32%, or $32 annually per $10,000 invested
The WisdomTree China ex-State-Owned Enterprises Fund (NASDAQ:CXSE) is a credible and arguably superior option to old school Chinese ETFs. Many of those funds are littered with financial services companies and exposures to other sectors chock full of lumbering, slow-growth state-controlled companies.
CXSE does not play that game. Rather, this Chinese ETF emphasizes sectors that are leading China’s economic growth while taking advantage of the move to more internal consumption. The consumer discretionary and communication services sectors combine for over 52% of this Chinese ETF’s weight. Conversely, those sectors combine for barely more than a quarter of the FTSE China 50 Index.
The difference is clear. CXSE is up 22.53% this year while the FTSE China 50 Index is higher by “just” 15.20%.
“When you look at cumulative earnings growth of the two indexes over the last four years, the traditional MSCI China Index has shown zero earnings growth — hence its lower multiple — while our ex- SOE Index has grown earnings over 40% since its inception, based on trailing 12-month earnings figures,” said WisdomTree.
Global X MSCI China Communication Services ETF (CHIC)
Expense Ratio: 0.65%
In the U.S., several ETFs are dedicated to the communication services sector and despite the group’s status as the newest sector in the S&P 500, investors are familiar with it because it is home to the likes of Facebook (NASDAQ:FB) and Netflix (NASDAQ:NFLX), among others. This fast-growing sector has applications and opportunities outside the U.S.
The Global X MSCI China Communication Services ETF (NASDAQ:CHIC), which debuted in December, is the first dedicated ex-U.S. communication services ETF. This Chinese ETF is off to a solid start with nearly $29 million in assets under management and a year-to-date gain of 17.54%, almost 600 basis points ahead of its U.S. counterpart. Fundamentals support considering this Chinese ETF.
“Communication Services ranks as the third largest GICS sector in China by market cap, which is similar to its fourth-place ranking in the US,” according to Global X research. “Overall, analysts anticipate that China’s Communication Services will deliver higher revenue growth versus its US counterpart, owing to several thematic tailwinds, including deepening internet penetration, rising wages & consumption, changing consumer habits to favor new technologies, and government support.”
KraneShares MSCI China Environment ETF (KGRN)
Expense Ratio: 0.79%
Investors can apply socially responsible investing virtues to Chinese ETFs with the KraneShares MSCI China Environment ETF (NYSEARCA:KGRN). This Chinese ETF follows the MSCI China IMI Environment 10/40 Index.
That index “is based on five key Clean Technology environmental themes: Alternative Energy, Sustainable Water, Green Building, Pollution Prevention and Energy Efficiency,” according to KraneShares.
There is long-term potential with this Chinese ETF due to the country’s massive pollution woes and government-led efforts to ease those problems.
When it comes to the opportunity set with KGRN, China already accounts for almost a third of the world’s renewable energy use and is looking to spend $360 billion on alternative and renewable energy by next year.
“Meeting these standards would create as much new renewable energy capacity as the entire US electricity system, and China would represent half of the world’s green building floor space,” said KraneShares.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
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