Recent escalations in the trade war between the U.S. and China have confirmed investors’ fears that the spat is far from over. Emerging markets exchange-traded funds (ETFs) had been solid performers this year and Chinese ETFs were leaders in that group, but the emerging markets bull thesis is dealt a significant blow if Chinese stocks are struggling. Remember this: Chinese equities represent approximately a third of the MSCI Emerging Markets Index.
Over the near-term, these are potentially tenuous times for Chinese ETFs, especially with the G20 summit about five weeks away.
Investors that currently own China ETFs do not need to respond to negative price action by immediately dumping their positions, but for investors not currently holding Chinese ETFs, some of the following funds may be worth avoiding until trade tensions cool.
Global X MSCI China Information Technology ETF (CHIK)
Expense Ratio: 0.65%, or $65 annually per $10,000 invested
In more sanguine market environments, there is definitely something to be said for China sector investing, particularly in the country’s sprawling consumer discretionary, internet and technology sectors. The other side of that coin is that Chinese technology stocks are vulnerable to the trade spat. Specifically, the Global X MSCI China Information Technology ETF (NYSEARCA:CHIK) has taken a major hit after news of continued tariffs hit the headlines.
CHIK, which debuted last December, holds 42 stocks, including electronic components makers, hardware and software providers and semiconductor manufacturers. Each of those industries has some vulnerability in the current trade spat.
As highlighted by its still strong year-to-date performance, this China ETF has plenty of potential to deliver strong returns. Investors considering CHIK are not off base with that thesis, but they should wait for macro risk to diminish before embracing this China ETF.
First Trust China AlphaDEX Fund (FCA)
Expense Ratio: 0.80%
The First Trust China AlphaDEX Fund (NASDAQ:FCA) is not the most well-known China ETF. FCA is over eight years old and has just $11 million in assets under management, but that is not the primary reason to avoid this China ETF amid trade tensions.
FCA was one of nearly 20 U.S.-listed China ETFs that lost 3% or more on Monday, May 6, when news of the now implemented tariffs first broke. In fact, just two Chinese ETFs notched bigger one-day losses than the 5.22% shed by FCA. Interestingly, FCA’s struggles amid heightened trade risk are not attributable to large weights to growth sectors, such as communication services, consumer discretionary and technology.
Those sectors combine for just over 18% of FCA’s weight. This China ETF allocates almost 35% of its combined weight to the defensive real estate and utilities sectors. FCA’s recent weak price action suggests even defensive sectors with small export exposure can be punished by trade fears.
Invesco Golden Dragon China ETF (PGJ)
Expense Ratio: 0.70%
The Invesco Golden Dragon China ETF (NASDAQ:PGJ) is an example of a “not right now” China ETF. PGJ is up 30.50% year-to-date, but it has be in the red recently. The problem is the fund’s recent decline puts PGJ in danger of falling below its 50-day moving average, an area the China ETF has not closed below since early January.
PGJ holds 64 stocks, but this China ETF features significant sector-level concentration risk as the consumer discretionary and communication services sectors combine for over 84% of the fund’s weight. That means this portfolio is heavy on growth stocks, a trait that could increase PGJ’s volatility and downside pressure if Chinese stocks falter for an extended period.
A best-case scenario for Chinese stocks “would mean the recent pullback is a buying opportunity, but if trade talks are canceled or go astray, it would force analysts and economists to revisit their forecasts. It would also mean China would look to more stimulus to help stabilize its economy,” reports Barron’s.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.