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Time for China ETFs?

Zacks Equity Research

The Chinese economy suffered in Q3 with stocks recording the worst quarter in seven years. The Shanghai Composite Index lost about 2,000 points or about 40% since the June peak and the Chinese stocks lost over $5 trillion thanks to the yuan devaluation and subdued manufacturing activity. In any case, issues like credit crunch, shadow banking activities and a weak domestic market bothered the economy for long while a tremendous sell-off in August made the matter awfully worse.

The Chinese regulators frantically introduced the stimulus measure to arrest the market crash, but the efforts went down the drain. This was the backdrop when China reported its Q3 GDP reports. The economy expanded 6.9% in Q3 outperforming the forecast of 6.8% by a whisker but fell from 7% recorded in Q2. This was the lowest Chinese growth since 2009.

While this definitely reinforced the momentum loss in the Chinese economic growth story, the better-than-expected GDP simultaneously guaranteed that the world’s second-largest economy is yet to experience a hard landing. A better-than-expected growth rate hinted at the partial success of the government rolled-out accommodative measures like consecutive rate cuts, a mini stimulus package mainly targeted at railways and other construction investment or a tax relief for small enterprises (read: China ETFs in Focus on Surprise Rate Cut).

With the government’s efforts appearing to bear fruits, a group of investors are now wagering on further monetary stimulus which could revert the Chinese economy to a wider growth lane once again. Already The People’s Bank of China (PBoC) has reduced key interest rates six times since November with the latest cut (by 25 bps) seen on October 23.

Also, PBoC lowered the reserve requirement ratio (RRR) for all banks by 50 bps. Banks providing loans to agricultural firms and small companies would receive a bonus 50-basis-point cut to their RRR. The latest reductions are likely to free up about $93.75 to $109.3 billion in liquidity as per one analyst.

The optimism rebounded further as the possibility of the early Fed rate hike was put to rest. Emerging market equities including China should celebrate the incessant inflow of hot money from the U.S. To add to this, the possibility of a fatter economic stimulus in the Euro zone also charged up the global risky assets along with China.

In fact, in the previous few sessions, tensions over the Chinese economy faded in the absence of negative news. Whatever downside have been witnessed in the economic news flow, were anticipated. Meanwhile, yuan also got back some strength and all these could favor the undervalued Chinese equities and ETFs in the days to come. Below we highlight three ETFs which are worth a look and are likely to outperform in the days to come.

Market Vectors ChinaAMC SME-ChiNext ETF (CNXT)

This fund looks to track the SME-ChiNext 100 index which seeks to track the performance of the 100 largest and most liquid China A-share stocks listed and trading on the Small and Medium Enterprise Board and the ChiNext Market of the Shenzhen Stock Exchange. Holding 101 stocks in its basket, the product is moderately spread out across components with each accounting for less than 4.72% share (read: 5 ETFs Up At Least 10% This Year).

Information Technology takes the top position from a sector look with little less than two-fifth allocation while Industrials, Consumer Discretionary and Health Care round off the next three spots. The product has amassed $55.2 million in AUM and sees moderate trading volume of about 90,000 shares a day on average. It charges about 66 bps in fees per year from investors and has surged about 21.7% in the last one month (as of October 23, 2015).

iShares MSCI China Small-Cap ETF (ECNS)

The fund looks to track the MSCI China Small Cap Index and offers exposure to the performance of stocks in the bottom 14% by market capitalization of the Chinese equity securities markets, as represented by the H-Share. The fund is an overlooked choice with just $27.8 million in assets and daily average trading volumes of 10,000 shares a day.

This Zacks ETF Rank #3 (Hold) fund charges 62 bps in fees. As much as 70.2% of the stocks hail from China while the rest belong to Hong Kong. The fund is heavy on Consumer Discretionary (21.9%) followed by Industrials (17.8%), Financials (16.3%) and IT (14.5%). ECNS has low company-specific concentration risks with no stock holding more than 1.41% of the basket. The fund was up 13.6% in the last one month (as of October 23, 2015).

Global X China Financials ETF (CHIX)

This ETF provides concentrated exposure to the financial segment of Chinese equity market by tracking the Solactive China Financials Index. In total, the fund holds about 40 securities in its basket with the top three firms – China Construction Bank, Industrial & Commercial Bank of China, and Bank Of China – dominating the returns holding more than 9% share each. It is a large cap centric fund accounting for 85% of assets (read: Where will China Financial ETFs Go from Here?).

The fund has amassed $58.5 million in its asset base while trades in moderate volume of 100,000 shares per day on average. It charges 65 bps in annual fees and expenses. The fund was up about 16.1% in the last one month (as of October 23, 2015) and has a Zacks ETF Rank of 3 with a Medium risk outlook.


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MKT VEC-CHINAMC (CNXT): ETF Research Reports
ISHARS-MS CH SC (ECNS): ETF Research Reports
GLBL-X CHIN FIN (CHIX): ETF Research Reports
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