U.S. Markets closed

An ETF With a new, Perhaps Better way to China

Amid declines in Chinese A-shares, the stocks trading on mainland China, Chinese equities and the corresponding U.S.-listed exchange traded funds have been receiving ample attention in recent weeks. Much of that attention has not been positive.

However, some analysts and investors argue the recent declines in Chinese stocks represent a buying opportunity. The Chinese economy, the second largest in the world, will still expand at a relatively high rate, albeit slightly slower than prior years. A newly reconfigured ETF could be an ideal avenue for capturing a rebound in Chinese stocks.

Earlier this month, WisdomTree (WETF), the fifth-largest U.S. issuer of exchange traded funds, said it converted the WisdomTree China Dividend Ex-Financials Fund (CHXF) to the WisdomTree China ex-State-Owned Enterprises Fund (CXSE).

The newly converted ETF tracks the WisdomTree China ex-State-Owned Enterprises Index (CHXSOE), which tracks Chinese companies that are not state-controlled. State owned enterprises are defined as government ownership of more than 20% of outstanding shares of companies, according to WisdomTree.

“What we are doing is saying ‘Own China, but don’t necessarily own the state owned companies.’ We think this is a very exciting new way to own China, and it hasn’t existed in the past,” said Christopher Gannatti, Associate Director of Research at WisdomTree, in an interview with TheStreet.com.

The newly converted ETF is heavy on technology and consumer discretionary names. Software and services names account for almost 28% of the WisdomTree China ex-State-Owned Enterprises Index with retailers and apparel stocks combining for over 15%. [China Internet ETF Staves Off Alibaba Slump]

The WisdomTree China ex-State-Owned Enterprises Index is home to 63 companies, nearly two-thirds of which are large-caps. The index sports a P/E ratio of about 13.7, a price-to-book ratio of 1.72 and a price-to-cash flow ratio of just over 11, according to WisdomTree data.http://www.wisdomtree.com/etfs/index-details.aspx?IndexID=145

“By removing China’s state-run companies from the fund, the CXSE maintains a very limited exposure to banks and energy stocks,” according to TheStreet.

CXSE is not WisdomTree’s first foray into emerging markets ETFs that explicitly steer clear of state-owned enterprises. In December, the issuer introduced the WisdomTree Emerging Markets ex-State-Owned Enterprises Fund (XSOE). True to its name, the WisdomTree Emerging Markets ex-State-Owned Enterprises Fund excludes state-run oil giants such as Petrobras (PBR) and Russian oil companies.

By excluding state-controlled firms, the WisdomTree Emerging Markets ex-State-Owned Enterprises Fund ratchets up exposure to the emerging markets consumer story, although the new ETF is a not a dedicated consumer fund. For example, XSOE’s combined weight to the technology consumer discretionary and staples sectors, three of the fund’s top four sector weights, is 50%. [This ETF Excludes State-Run Companies]

ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.