Chinese shares are back in play again after years of being dogged and shunned like the ugly stepchild.
So, it’s time to take a dive into what type of ETFs or even share classes look promising. Regarding favorable sectors, the consumer space looks particularly attractive.
Increasing domestic demand and a lessening of the country’s dependence on exports has been a main focal point of the Chinese government’s newest Five-Year Plan (2011-2015), and Chinese officials recently reiterated this point.
Of the various share classes, A-shares focused on mainland Chinese companies have suddenly turned hot again, after the Shanghai Composite Index hit a nearly four-year low just a month ago. Until recently, A-shares were lagging behind the performance of other Chinese share classes, which have been rallying since late summer of 2012.
Targeting Chinese Consumers
The most popular China ETFs offer little to no exposure to the consumer space. The $9 billion iShares FTSE China 25 Index Fund (NYSEArca: FXI) has zero exposure to the consumer sectors, while the $1.1 billion SPDR S&P China ETF (NYSEArca: GXC) has only 11 percent.
Instead, state-owned mega caps mostly dominate these types of funds. For example, China Mobile, the four big state-owned banks and the three big state-owned energy names make up 52 percent of FXI. Even in GXC—which I consider to be the SPY of China ETFs and currently the best choice for all-around exposure to China—these eight companies constitute 36 percent of the fund.
While there’s nothing inherently wrong with being overweight mega caps, investors preferring more exposure to the growth potential of smaller consumer-focused, nonstate-owned companies do have a number of other ETFs to choose from.
My two favorites here are the Global X China Consumer ETF (NYSEArca: CHIQ) and the Guggenheim China Small Cap ETF (NYSEArca: HAO).
As the name suggests, CHIQ specifically targets the consumer space and holds an assortment of 40 investable Chinese shares from both the consumer cyclical and noncyclical sectors. The fund holds mostly H-shares traded in Hong Kong, but also includes a few U.S.-listed N-shares in the mix.
HAO doesn’t necessarily target the consumer space, but it holds over 200 mid- and small-caps from all investable shares and its consumer cyclical and noncyclical exposure is roughly 25 percent of the fund. The fund has about 40 percent in companies with market caps greater than $2.7 billion, which we consider midcaps.
The iShares MSCI China Small Cap Index Fund (NYSEArca: ECNS) is a small-cap fund that holds over 300 companies and has about 28 percent exposure to the two consumer sectors. ECNS is more of a pure-play on small-caps, with 97 percent in companies with less than $600 million in market cap.
Between the two small-cap ETFs, I prefer HAO. I like that it’s able to hold some larger established names like Tsingtao Brewery and the Warren Buffett-backed car maker, BYD. Also, it includes U.S.-listed N-shares in the mix, such as Sohu.com and Youku Tudou.
Writing naked puts on high-vol stocks sounds risky, but it’s delivered a smooth ride to fat yields lately.
Bank-loan funds are worth a look, but make sure it’s a close look.
With the China A-share market now open, ETF investors have some choices to make.
Smart beta isn’t smarter than cap weighting, but it is different, and that’s good.