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China Financial ETFs: Stable, Bargain Bin Play?

This article was originally published on ETFTrends.com.

As investors look for opportunities after the pullback, with some turning the emerging market countries like China, some may consider Chinese financial companies and related country-specific exchange traded funds for a more stable approach to the developing economy.

According to State Street Global Advisors, cheap valuations and a government that can easily bail out pockets of China’s financial sector from instability makes the country’s bank stocks a buy, Bloomberg reports.

Olivia Engel, chief investment officer of active quantitative equity at State Street Global Advisors, argued that Chinese banks provide return-on-equity levels as high as any other segment in the emerging markets.

“While investor sentiment is poor vis-à-vis Chinese banks, earnings forecasts are starting to turn upward,” Engel told Bloomberg. “The resulting valuation gap among Chinese banks - especially when viewed together with favorable quality attributes in this segment - presents a margin of safety for investors.”

For example, the Global X China Financials ETF (CHIX), which provides broad exposure to companies in the Chinese financials sector, trades at a 7.7 price-to-earnings and a 0.9 price-to-book. In comparison, the S&P Financial Select Sector Index, which is comprised of S&P 500 financial companies, are trading at a 12.5 P/E and a 1.4 P/B.

“Valuations are even more favorable among Chinese banks, where fears of widespread instability in the banking system have so far failed to materialize,” Engel added.

ETF investors can also gain a more diversified exposure to Chinese markets through broad China country-specific ETFs, which also include heavy tilts toward state-owned banks and the financial sector. For example, the SPDR S&P China ETF (GXC) includes a large 22.9% tilt toward financials and the iShares China Large-Cap ETF (FXI) holds 46.6% in financials. Both of the funds include names like China Construction Bank, Industrial and Commercial Bank of China, and Ping An Insurance, among others, in their top holdings.

For more information on the Chinese markets, visit our China category.