Napoleon famously said that “China is a sleeping giant. Let her sleep, for when she wakes she will move the world.” While Napoléon was talking about China’s military might, his quote could be directed towards its economic prowess and China ETFs as well.
Sure, China is currently going through some growing pains. But its history and more importantly, its future growth make up for the current headache.
Already a manufacturing economic tour de force, 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 or one of the various China ETFs. And despite the current hiccups, that fact is still very well in place. As are its high GDP growth and financial prowess.
Meanwhile, the current malaise has only made Chinese stocks that much cheaper. The FTSE China 50 Index can be had for a P/E of just 10.
With that in mind, the chance to take a long-term position in China ETFs could be now. Here are three of the best.
Must-Have China ETFs: iShares MSCI China Index Fund (MCHI)
Expense Ratio: 0.62% per year, or $62 on a $10,000 investment.
Most investors and traders choose the $3.8 billion iShares China Large-Cap ETF (NYSEARCA:FXI) when looking at core China ETFs. However, its sister fund — the iShares MSCI China Index Fund (NASDAQ:MCHI) — could actually be the better China ETF pick.
The reason comes down to index.
FXI’s underlying index is designed to hold just the 50 largest Chinese stocks. MCHI on the other hand, offers a broader take on China. This China ETF currently has 151 holdings, including both large- and mid-cap Chinese stocks, which represent roughly 85% of the nation’s stock market. Top holdings include shopping site Alibaba Group Holding Ltd (NYSE:BABA) and Chinese energy giant Cnooc Ltd (ADR) (NYSE:CEO).
The added exposure to mid-caps does have its benefits. The addition of the “sweet spot of the market” has provided extra returns for MCHI over its history. The China ETF has outperformed its larger, more concentrated sister fund by about 1.5% annually, over the last 5 years. MCHI wins on expenses as well. The China ETF charges 0.62% or $62 per year for $10,000 invested. FXI charges 0.73%.
In the end, when it comes to broad exposure to Asia’s top emerging market, the China ETF to go with is MCHI.
Must-Have China ETFs: Vectors ChinaAMC SME-ChiNext ETF (CNXT)
Expense Ratio: 0.79%
Small-caps can often be seen as direct play on a nation’s economic growth. After all, they simply don’t have the ability to have multinational operations and almost all of their revenues come from their homeland.
For China, the direct play is through A-shares. These are firms that are listed on the Shanghai and Shenzhen exchanges and are strictly off limits for most foreigners to buy and trade. Only certain institutional investors are allowed to dabble in the A-shares market.
That means to buy them, you need to use a China ETF and the Vectors ChinaAMC SME-ChiNext ETF (NYSEARCA:CNXT) is the one to choose.
CNXT tracks the SME-ChiNext 100 Index. This measure follows the 100 largest and most liquid A-shares on the Small and Medium Enterprise and ChiNext Board of the Shenzhen Stock Exchange. That may sound like a mouthful, but this China ETF really provides exposure to the Chinese local economy and its citizens.
Surprisingly, China’s local economy is pretty high tech. More than 35% of the ETFs holdings are tech stocks. Meanwhile, the rest of CNXT’s holdings are tied to rising consumerism. The focus on small, local and high growth seems to be working for this China ETF. CXNT has returned roughly 12% annually since its inception a few years ago.
Must-Have China ETFs: PowerShares Golden Dragon China Portfolio (PGJ)
Expense Ratio: 0.70%
For some investors, betting directly on Chinese stocks is a little concerning. After all, there have been some cases of fraud with Chinese stocks. To that end, the PowerShares Golden Dragon China Portfolio (NYSEARCA:PGJ) may be a good bet.
PGJ still owns Chinese stocks. However, this China ETF owns U.S. exchange-listed companies that are headquartered or incorporated in the People’s Republic of China. That means ADRs. And with ADRs, comes U.S. accounting and reporting standards. That should limit the potential for accounting shenanigans and provide some protection for investors.
It also adds some familiarity to the fund’s holdings. Names like China Mobile Ltd. (ADR) (NYSE:CHL), Canadian Solar Inc. (NASDAQ:CSIQ) and PetroChina Company Limited (ADR) (NYSE:PTR) dot PGJ’s 60-plus holdings. And like the previously mentioned CNXT, PGJ is big on growth. More than 79% of its assets are in tech and consumer discretionary stocks. That makes it a great pick for playing the rising middle class in China.
Overall, PGJ provides plenty of exposure to China without some of the baggage and anxiety that comes with directly owning Chinese stocks.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.