The first quarter was kind to emerging markets equities and China was a big reason why. In the first three months of 2019, the MSCI Emerging Markets Index gained 9.90% while the MSCI China Index was higher by 18.6%.
China stocks and the related exchange-traded funds (ETFs) have been buoyed by an array of supportive factors, including increased risk appetite and some solid economic data, indicating investors are getting over somewhat slower economic growth in the world’s second-largest economy.
“A mix of Chinese stimulus measures have been providing the fodder for economic growth, such as lower taxes, no corporate tax breaks, monetary policy adjustments, and more market access for foreign companies to set up shop,” reports ETF Trends. “All in all, Wall Street is looking at the Chinese government’s latest efforts as a plus for its economy and a boon for China ETFs.”
Investors should note there are dozens of China ETFs to consider, with choices ranging from the prosaic to the adventurous. Although Chinese stocks may appear to have limited upside from here, some of the following China ETFs could pleasantly surprise investors over the rest of 2019.
China ETFs: VanEck Vectors ChinaAMC SME-ChiNext ETF (CNXT)
Expense Ratio: 0.65% per year, or $65 on a $10,000 investment.
In the China ETF conversation, the VanEck Vectors ChinaAMC SME-ChiNext ETF (NYSEARCA:CNXT) often goes overlooked, but there are some good reasons why that should not be case. One of those is the fact CNXT is one of the prime avenues for investors looking for exposure to mid- and small-cap companies trading on mainland China, a previously tough-to-access asset class.
Up 44% year-to-date, CNXT is benefiting from a theme previously highlighted in this space: MSCI’s recent decision to increase the percentage of A-shares in its international indexes, including the MSCI Emerging Markets Index.
“One critical development is that securities on the ChiNext board of the Shenzhen Stock Exchange are set to be included this year, in addition to mid-cap A-share companies,” said VanEck in a recent note. “These types of companies are generally smaller and operate in consumer-led sectors, so they have exposure to the segments of the Chinese economy that we believe are expected to drive growth going forward.”
Global X MSCI China Consumer Discretionary ETF (CHIQ)
Expense Ratio: 0.65%
Investors looking for ways to tap new retail themes do not need to confine their searches to domestic stocks and funds. China ETFs, such as the Global X MSCI China Consumer Discretionary ETF (NYSEARCA:CHIQ), provide leverage to the e-commerce and online retail themes.
In fact, an argument can be made that China ETFs are the superior ways for access to the e-commerce boom simply because China’s internet market is significantly larger than that of the U.S., meaning the potential for online sales growth is larger in China than in major developed markets. Those are some of the reasons why CHIQ is up 28.53% year-to-date, compared to a gain of 15% for the largest U.S.-focused consumer discretionary ETF.
“Online retail sales in China exceeded ¥9 trillion in 2018, topping the world for the sixth consecutive year, spokesperson Gao Feng said during a regular conference of the Ministry of Commerce (MoC) on 21 March,” reports The Telegraph. “The country’s online retail sales maintained high-speed growth over the past 10-plus years, said Gao, who is also deputy director-general of the General Office of the MoC.”
Global X MSCI China Communication Services ETF (CHIC)
Expense Ratio: 0.65%
The Global X MSCI China Communication Services ETF (NASDAQ:CHIC) is another Global X China ETF focusing on a sector that is also available via domestically focused funds. In the case of CHIC, this China ETF is trailing the largest U.S. communication services ETF by 100 basis points this year, but that does not diminish the opportunity set with this sector in China.
In the S&P 500, communication services is the fourth-largest sector weight, but in China, the sector is the third-largest sector allocation. For investors looking for growth in this sector, there are compelling reasons to consider CHIC and related Chinese ETFs.
“Overall, analysts anticipate that China’s Communication Services will deliver higher revenue growth versus its U.S. counterpart, owing to several thematic tailwinds, including deepening internet penetration, rising wages & consumption, changing consumer habits to favor new technologies, and government support,” according to Global X research.
Xtrackers MSCI All China Equity ETF (CN)
Expense Ratio: 0.5%.
Among China ETFs, the Xtrackers MSCI All China Equity ETF (NYSEARCA:CN) is one of this year’s most impressive stories that not many market participants are paying attention. After toiling in relative anonymity for nearly five years, CN is finally getting its due.
As of the end of the first quarter, CN had more than $433 million in assets under management, thanks to nearly $380 million in year-to-date inflows. This China ETF is an effective way of accessing a broader basket of Chinese stocks across multiple share classes, a strategy that almost makes one ponder why it took so long for investors to warm to this Chinese ETF. CN tracks the MSCI China All Shares Index and is up 24% this year.
That index “captures large- and mid-cap representation across China A-shares, B-shares, H-shares, Red-chips, and P-chips. The index aims to reflect the opportunity set of China share classes listed in Hong Kong, Shanghai and Shenzhen,” according to DWS.
WisdomTree ICBCCS S&P China 500 Fund (WCHN)
Expense Ratio: 0.55%.
The WisdomTree ICBCCS S&P China 500 Fund (NYSEARCA:WCHN) is a China ETF that is perhaps one of the closest comparisons to the S&P 500 because WCHN follows the equivalent China benchmark, the S&P 500 China Index.
With WCHN up 27% this year, it is clear this China ETF is a different beast than its domestic S&P 500 counterparts. The WisdomTree fund allocates about 41% of its combined weight to the financial services and consumer discretionary sectors. And yes, communication services is the third-largest sector weight in this China ETF at almost 12%.
With some data points indicating many investors are underweight China, WCHN is a China ETF appropriate for many investors to boost exposure to this emerging economy.
Wisdometree said “For investors looking for a broad access vehicle to Chinese equity beta, WisdomTree launched a Fund to track the S&P China 500 Index—WCHN, the WisdomTree ICBCCS S&P China 500 Fund. MSCI is adding more A-shares this year and will have to continue to creep higher in their exposure, but our fund is already positioned across all the Chinese stocks,” according to an ETF Trends article.
Invesco Golden Dragon China ETF (PGJ)
Expense Ratio: 0.7%.
The Invesco Golden Dragon China ETF (NASDAQ:PGJ) is approaching its fifteenth birthday, making it one of the older U.S.-listed China ETFs. PGJ tracks the NASDAQ Golden Dragon China Index, which is made up of of Chinese companies that trade on major U.S. exchanges.
Despite its age, PGJ is another Chinese ETF with hidden gem status, particularly for investors looking to stay away from slow-growing sectors such as financial services and energy. This fund should not be overlooked, given the fund’s leverage to fast-growing sectors. Around 84% of PGJ’s combined weight is allocated to the consumer discretionary and communication services sector.
The rub with PGJ is that is often more volatile than traditional China ETFs, owing to its emphasis on growth sectors. That said, PGJ’s price-to-earnings ratio of 25.29 compares favorably with U.S. internet funds, a relevant comparison because eight of this China ETF’s top 10 holdings are internet stocks.
KraneShares CCBS China Corporate High Yield Bond USD Index ETF (KCCB)
Expense Ratio: 0.69%.
For adventurous fixed income investors, the KraneShares CCBS China Corporate High Yield Bond USD Index ETF (NYSEARCA:KCCB) is a China ETF to consider. While many investors think of the U.S. as the king of the high-yield corporate bond market, there are some junk bond opportunities in emerging markets, many of which are found in China’s fast-growing high-yield bond market.
“The total value of Chinese USD denominated high yield bonds increased over 300% from 2017 to 2018, and the number of issuing companies increased by almost 150% over the same period,” according to KraneShares. “By the end of 2018, the total USD China Corporate High Yield Bond market size reached $232 billion USD with over 250 issuing companies.”
At the end of last year, KCCB had a 30-day SEC yield of 5.3% and its duration is 6.7 years.
As of this writing, Todd Shriber does not own any of the aforementioned securities.