When it comes to emerging markets, perhaps none is as important as China. Already a manufacturing economic tour de force — which has helped propel Beijing to the top of world — the nation’s huge middle class is seen as driving the global economy long into the future. That burgeoning middle class continues to be one of the main catalysts for investing in Chinese stocks.
However, in recent quarters, China hasn’t felt like an economic tour de force.
Chinese stocks recently hit fresh 4 ½-year lows back in February and are down roughly 15% this year alone. The exact culprit is hard to pin down. Chinese stocks have been hit on a variety of fronts — from an economic and manufacturing slowdown to capital outflows and a recent devaluations to the yuan. All of these factors have caused investors to flee Chinese stocks like a bad habit.
But as they say, “be greedy when others are fearful.”
Many of the long-term reasons for buying Chinese stocks — such as that large, growing middle-class population — are still in place. Longer-term investors now have the opportunity to load up on stocks on the super cheap from one the most important nations.
Here are three ETFs to play Chinese stocks today.
Must-Have ETFs to Play Chinese Stocks: iShares MSCI China Index Fund (MCHI)
Expense Ratio: 0.62%, or $62 per $10,000 invested
Most investors gravitate toward the $4.7 billion iShares China Large-Cap ETF (FXI) when looking at a core ETF to bet on Chinese stocks. However, its slightly smaller twin — the iShares MSCI China Index Fund (MCHI) — is actually a better bet.
FXI just focuses on the 50 largest Chinese stocks that trade in Hong Kong. MCHI, however, expands its reach to feature all the nation’s large and mid-cap stocks available to international investors. That’s more than 150 different Chinese stocks and includes some exposure to some American-traded ADRs like Alibaba Group Holding Ltd (BABA) and Ctrip.com International, Ltd. (ADR) (CTRP).
The added exposure does have its benefits. For starters, the addition of faster-moving, mid-cap stocks can provide extra returns for MCHI. Historically, mid-caps have been the sweet spot of the market.
Secondly, MCHI has a more balanced exposure to various sectors. FXI has more than half of its portfolio in financials, whereas MCHI has only around 34% in the sector. That difference basically gets added to technology and consumer sectors. Again, faster growing areas of the market.
This seems to hold true on the returns side. Looking at the two ETF’s benchmarks, MCHI’s managed to outperform FXI by around 1.4% annually over the 10 years.
MCHI wins on the expenses front as well — costing only $62 per $10,000 invested versus $73 for the FXI.
Must-Have ETFs to Play Chinese Stocks: Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR)
Expense Ratio: 0.8%
One of the biggest opportunities in Chinese stocks has been off limits to international investors for years. I’m talking about China’s A-shares. These are firms that are incorporated on the mainland, listed on the Shanghai and Shenzhen exchanges and denominated by renminbi. The vast bulk of Chinese stocks are A-Shares. For years, they have been off-limits until China started handing out “qualified foreign institutional investor status” licenses.
The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) allows you to tap into this “real” area of the Chinese market.
ASHR tracks the CSI 300 Index — which is a measure of the 300 largest and most liquid stocks trading on the Shanghai and Shenzhen exchanges. And while the names of the ETF’s top holdings may not sound familiar to you. Stocks like Ping An Insurance Group or Jiangsu Hengrui Medicine aren’t exactly household names even when it comes to Chinese stocks. Truth is they are some of the biggest firms in their respective industries.
As an American, you just never had access to them before.
With the fund taking a big beating over the last year, now could be the perfect time to add exposure to the “real” China via ASHR and the nation’s A-shares.
Must-Have ETFs to Play Chinese Stocks: Global X China Consumer ETF (CHIQ)
Expense Ratio: 0.65%
With so much of China’s future tied to its growing middle class and its transition into a consumer-based economy, why not cut out the middle man and focus on consumer Chinese stocks?
The Global X China Consumer ETF (CHIQ) makes that task easy.
CHIQ tracks the Solactive China Consumer Total Return Index, which is a measure of all the consumer discretionary and staple stocks that operate in China. The fund’s 38 holdings read like a who’s who of retail, beverage, media, apparel and personal and household products companies in the nation. Top holdings include BABA, JD.Com INC(ADR) (JD) and Mengniu Dairy.
Overall, CHIQ offers a pretty even mix of consumer sub-sector exposure and should be a huge benefit as China’s consumer revolution takes place.
So far, returns for the ETF have been mixed. Debuting during the credit crisis, CHIQ has been a roller coaster ride and it has bounced along with China’s overall market. However, the name of the game for this one is long-term.
As long as China continues along its consumer path, CHIQ should be a huge winner. That makes the fund an ideal way to play Chinese stocks and Beijing’s growth.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.