Emerging markets stocks and exchange-traded funds (ETFs) struggled through a miserable 2018 as the MSCI Emerging Markets Index lost more than 15% on the year. Chinese ETFs were among the most egregious offenders.
Last year, the iShares China Large Cap ETF (NYSEARCA:FXI) and the iShares MSCI China ETF (NASDAQ:MCHI), two of the largest Chinese ETFs trading in the U.S., lost 13.3% and 19.8%, respectively. Still, there are hopes that moves by the Chinese central bank coupled with the potential for headway on the U.S.-China trade spat could spur Chinese ETFs over the near-term.
“From a stock market perspective, with a lot of negative news already priced in, we could realistically hope that the absence of further negatives may at least lead to some stabilisation in equity prices,” Colin Morton, a portfolio manager at Franklin Templeton Investments, told the Financial Times.
Currently, trade teams from the U.S. and China are meeting in Beijing and there is optimism those talks could result in a credible trade truce, which could spark a rally in Chinese ETFs.
“A potential deal would likely involve a sharp increase in Chinese purchases of American soybeans and liquefied natural gas,” reports the Washington Post.
However, if trade talks falter, the following Chinese ETFs merit caution over the near-term.
Invesco China Technology ETF (CQQQ)
Expense Ratio: 0.70% per year, or $70 annually per $10,000 invested
Funds focusing on China’s fast-growing internet and technology sectors overshot the 2018 losses of traditional Chinese ETFs significantly. Just look at the Invesco China Technology ETF (NYSEARCA:CQQQ), which tumbled more than 35% last year.
CQQQ, which tracks the AlphaShares China Technology Index, is indeed a tempting bet for investors looking to buy the dip in Chinese ETFs. Prior instances of Chinese internet stocks outperforming their U.S. counterparts only add to the allure of CQQQ and rival Chinese internet funds. Home to 74 stocks, CQQQ features exposure to just three sectors: communication services, consumer discretionary and technology.
In other words, this Chinese ETF is a growth fund and investors need to renew their enthusiasm for growth fare, U.S. and Chinese stocks alike, before CQQQ can rebound from its 2018 doldrums.
Invesco China Small Cap ETF (HAO)
Expense Ratio: 0.75%
In the U.S., small-cap stocks were stars through the first three quarters of 2018, but ex-U.S. small caps scuffled for most of the year. Later in the year, domestic small caps faltered before large-cap fare, pressuring international rivals along the way. Over the past 90 days, the Invesco China Small Cap ETF (NYSEARCA:HAO) has performed less poorly than the U.S.-focused Russell 2000 Index.
However, investors should not be deceived by that point, Over the past year, HAO is lower by 26.4% while the Russell 2000 is lower by less than 10%.
While China is far from entering a recession, economic growth there is slowing a bit and that scenario is likely to strain smaller stocks more than large-cap names. That could make betting on HAO and other small-cap Chinese ETFs difficult given the elevated volatility that comes with international small caps. Over the past three years, HAO’s annualized volatility is about 400 basis points higher than the Russell 2000’s.
Global X MSCI China Consumer Discretionary ETF (CHIQ)
Expense Ratio: 0.65%
There is undoubtedly a compelling long-term case for tapping the Chinese consumer, a theme that’s accessible via Chinese ETFs such as the Global X MSCI China Consumer Discretionary ETF (NYSEARCA:CHIQ). As is the case in the U.S., consumer discretionary stocks are cyclical in China and likely to overshoot broader market losses when stocks decline.
That was the case for CHIQ in 2018 as this Chinese ETF tumbled 28.7%. This Chinese ETF is heavily dependent on internet stocks, a corner of the Chinese equity market that was savagely repudiated last year. For example, Alibaba (NYSE:BABA) and JD.com Inc. (NASDAQ:JD) combine for about 15.8% of CHIQ’s weight. Some recent data points outline the near-term risks associated with consumer-oriented Chinese ETFs.
“A decrease in Chinese car sales is one key data point that has been misconstrued, China experts say,” reports NBC News. “Automotive consulting firm ZoZoGo found that car sales in China reversed course last year and fell by 3 percent after roughly two decades of growth, and the country’s largest automotive trade group also has reported sinking sales figures in recent months.”
Reality Shares Nasdaq NexGen Economy China ETF (BCNA)
Expense Ratio: 0.78%
The Reality Shares Nasdaq NexGen Economy China ETF (NASDAQ:BCNA) is one of the newer members of the Chinese ETFs fray, having debuted in June 2018. BCNA targets the Reality Shares Nasdaq Blockchain China Index, which is “designed to measure the returns of companies in China that are committing material resources to developing, researching, supporting, innovating or utilizing blockchain technology for their use or for use by others,” according to Reality Shares.
While blockchain has myriad applications throughout the technology universe and other industries, investors still often associate blockchain as being intimately linked to the crypto currency space. That is a plus for Chinese ETF like BCNA when cryptocurrencies are rallying, but the opposite was true last year when bitcoin lost 80% of its value.
As a result of weakness in the cryptocurrency market, BCNA is off to an inauspicious start, having shed more than 13% since inception.
Franklin FTSE China ETF (FLCH)
Expense Ratio: 0.19%
With its annual fee of just 0.19%, the Franklin FTSE China ETF (NYSEARCA:FLCH) is one of the cheapest Chinese ETFs on the market. While investors love a good deal on ETF fees, cheap ETFs rise and fall, just like their high-fee counterparts.
FLCH proves as much. Low fee or not, this Chinese ETF is down more than 22% over the past year. This fund is a broad market play on China that holds 274 stocks with a weighted average market capitalization of $157.8 billion.
FLCH allocates about 52% of its combined weight to communication services and financial services stocks, while the consumer discretionary and industrial sectors combine for almost 26% of the fund’s weight. Reflecting the state of affairs with Chinese stocks, FLCH has a low price-to-earnings ratio of just 10.86, but neither that trait nor its low fee insulate this fund from further declines in Chinese stocks.
Invesco Golden Dragon China ETF (PGJ)
Expense Ratio: 0.70%
The Invesco Golden Dragon China ETF (NASDAQ:PGJ) is one of the oldest Chinese ETFs in the U.S., having recently celebrated its 15th birthday. Relative to other broad market Chinese ETFs, PGJ has a small lineup of just 64 stocks.
A small number of stocks in an ETF can expose investors to concentration risk at the sector and individual holdings levels. That is a consideration with this Chinese ETF as just two sectors — communication services and consumer discretionary — combine for over 83% of PGJ’s weight. Plus, the fund’s top three holdings combine for over a quarter of its weight.
PGJ needs those sectors to rebound because when those groups falter, this Chinese ETF suffers as highlighted by a 2018 decline of 29.5%.
SPDR S&P China ETF (GXC)
Expense Ratio: 0.59%
The SPDR S&P China ETF (NYSEARCA:GXC) is a basic broad market Chinese ETF that has one of the largest rosters — nearly 360 stocks — among the Chinese ETFs highlighted here.
GXC components are “publicly listed companies with a float-adjusted market cap of $100M and at least $50M in annual trading volume are included in the Index,” according to State Street.
As is the case with the aforementioned PGJ, there are elements of concentration risk with GXC. The ETF’s top two holdings — Tencent Holdings Ltd. (OTCMKTS:TCEHY) and Alibaba — combine for over a quarter of the fund’s weight. Three sectors — communication services, financial services and consumer cyclicals — combine for two-thirds of GXC’s roster, indicating a lot needs to go right for this Chinese ETF to rebound from its 2018 loss of 19.4%.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
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