Emerging markets stocks and the related exchange-traded funds (ETFs) are getting hammered this year, and China is a big reason why. The MSCI Emerging Markets Index is down almost 19% year-to-date while the iShares China Large-Cap ETF (NYSEARCA:FXI), one of the largest Chinese ETFs, was lower by almost 10%.
China, the world’s second-largest economy behind the U.S., is by far the largest geographic exposure in the widely followed MSCI Emerging Markets Index. The country accounts for 31.3% of that index, or more than double the weight assigned to the index’s largest geographic exposure.
On the upside, Chinese stocks have outperformed their U.S. counterparts since the recent announcement of a trade truce between the two global economic heavyweights.
“Shares in China have outperformed their U.S. counterparts since Beijing and Washington agreed to hold fire in their trade battle, reversing a pattern that has held for most of this year,” reports MarketWatch. “Calm has returned to China’s stock markets after a dismal and volatile year, amid expectations Beijing will take more potent measures to arrest an economic slowdown.”
For investors who want to embrace some risk, the following Chinese ETFs could be winners in 2019.
iShares MSCI China ETF (MCHI)
Expense Ratio: 0.62%, or $62 annually on a $10,000 investment.
Home to $3.7 billion in assets under management, the iShares MSCI China ETF (NASDAQ:MCHI) is one of the largest Chinese ETFs trading in the U.S. MCHI is home to just 303 stocks, a decent number relative to other Chinese ETFs, but not reflective of the expansive Chinese economy.
This Chinese ETF does an admirable job of reducing exposure to financial services companies (23% weight) compared to legacy Chinese ETFs. Rather, MCHI is heavily allocated to internet-related names (27% weight), explaining why this Chinese ETF is lower by around 19% year-to-date.
“We are constructive on Chinese equities despite tensions over trade,” said BlackRock. “We see protectionist threats as largely negotiating tactics, while Chinese reforms, a stable growth environment and a solid earnings outlook support equities.”
KraneShares CSI China Internet ETF (KWEB)
Expense Ratio: 0.7%
Speaking of Chines internet stocks, the KraneShares CSI China Internet ETF (NYSEARCA:KWEB) is the premier Chinese internet ETF. Typically, KWEB’s internet emphasis has served the fund well, but with the likes of Alibaba (NYSE:BABA) and Baidu (NASDAQ:BIDU) languishing this year, KWEB is doing the same with a year-to-date loss of more than 31%.
While KWEB is lagging this year, solid fundamentals still underpin the investment thesis for this Chinese ETF. Investors considering KWEB would do well to look at Chinese economic data beyond GDP.
Recent “retail sales beat expectations, growing by 9.2% versus a 9.0% estimate,” said KraneShares. “This reflects a well-documented phenomenon occurring in China over the past decade that still goes largely unreported. China is shifting from an industrial/export-driven economic model that represented the ‘old China’ economy to a services/domestic consumption-based economic model that characterizes the ‘new China.’”
KraneShares MSCI All China Health Care Index ETF (KURE)
Expense Ratio: 0.82%
The KraneShares MSCI All China Health Care Index ETF (NYSEARCA:KURE) debuted late last January, making it one of the newest Chinese ETFs. Like other such funds, including thematic sector plays, KURE is scuffling due to macro concerns. However, as is the case with the aforementioned KWEB, solid fundamentals bode well for this Chinese ETF.
U.S. investors often rush to embrace domestic healthcare stocks and ETFs, but they should not overlook the significant opportunity set offered by the Chinese healthcare sector. China is the fastest-growing and second-largest healthcare market in the world.
“There is still opportunity for considerable growth in China’s healthcare market with per capita health spending at just $420, compared to an average of over $5,800 for the world’s top eight healthcare markets in terms of per capita expenditure,” according to KraneShares.
Global X MSCI China Utilities ETF (CHIU)
Expense Ratio: 0.65%
Global X recently added six China sector ETFs to its lineup, including the Global X MSCI China Utilities ETF (NYSEARCA:CHIU). This rookie Chinese ETF tracks the MSCI China Utilities 10/50 Index. Chinese ETFs and stocks are more volatile than domestic equivalents, but China’s utilities sector is still viewed as defensive.
Defensive investing with Chinese sector has been rewarding in recent years. Between 2012 and this year, either the defensive utilities or real estate sectors were China’s best-performing sectors in four of those seven years. Year-to-date, utilities is the leading sector in China.
MSCI’s recent move to include China’s A-shares equities (the stocks trading on the Chinese mainland) improved the depth of some Chinese sectors. CHIU is home to 27 stocks, just two less than reside in the domestic Utilities Select Sector Index.
WisdomTree China ex-State-Owned Enterprises Fund (CXSE)
Expense Ratio: 0.32%
An issue with old-school Chinese ETFs is those funds’ exposure to slow-growing state-owned enterprises (SOE), many of which dwell in the energy and financial services sectors, among others. Long-term track records indicate some Chinese ETFs have been hampered by large exposure to SOEs, particularly when Chinese bank stocks fall out of favor.
The WisdomTree China ex-State-Owned Enterprises Fund (NASDAQ:CXSE) keeps with the “new China” theme by excluding Chinese companies where government ownership is in excess of 20%. This Chinese ETF allocates less than 13% of its weight to financials, a small percentage compared to some traditional Chinese ETFs.
CXSE tilts toward faster-growing segments of the Chinese economy with a combined weight of nearly 53% to the consumer discretionary and communication services sectors, meaning this Chinese ETF features significant exposure to the country’s marquee internet equities.
As of this writing, Todd Shriber did not own any of the aforementioned securities.
