Investing In The 'New China' With ETFs

August 15, 2014

China’s Rising Consumer

It’s no secret that Chinese leaders are now envisioning a transition from an export- and investment-led model to a consumption-led one.

According to one McKinsey & Co. report, “mainstream” consumers, which McKinsey defines as consumers with incomes of over RMB 106,000 (roughly $17,200), will surge to roughly 400 million people by 2020.

It’s no slam dunk that they’ll be successful, and this theme looks like it’s recently hit a snag with growth slowing. But it does look like the leadership is fully committed to this change over the long haul.

For investors wanting to hone in on this consumer theme, overweighting consumer-related companies and other sectors targeted by the government can make sense. This means targeting ETFs with heavy exposure to P-chips or N-shares (see our 2014 China ETF Guide for details).

Currently, the major China ETFs, such as the iShares China Large-Cap ETF (FXI | B-48), the iShares MSCI China ETF (MCHI | B-43) and the SPDR S&P China ETF (GXC | B-44), by design are heavily weighted in SOEs that dominate the financials, energy and telecom sectors.

For example, financials (mostly all SOEs) utterly dominate FXI, with a 55 percent weighting, as well as MCHI and GXC, with 37 and 31 percent, respectively.

Noteworthy China ETF Exposure

Luckily, there are several ETFs, albeit smaller than the older and much bigger ones, that offer greater exposure to some of China’s entrepreneurial and consumer-focused companies.

One of my favorites in this space has been the Global X China Consumer ETF (CHIQ | B-37). For 65 basis points, the $150 million CHIQ holds a concentrated portfolio of 40 investable “offshore” Chinese stocks from the consumer cyclicals and non-cyclicals sectors.

Liquidity in CHIQ isn’t exactly robust, trading $500,000 a day, at 19 basis-point spreads, but it’s more than enough for most retail folks. One sour spot is that CHIQ’s portfolio currently isn’t “cheap,” with a trailing price-earnings ratio (P/E) of 19.89.

The Guggenheim China Small Cap ETF (HAO | C-27) is another interesting play here, as its small-cap focus shuns the major SOEs. For 75 basis points, the $221 million HAO holds more than 260 investable “offshore” Chinese securities.

In HAO’s current composition, financials are significantly cut down to about 17 percent, while industrials make up roughly 19 percent, and consumer-focused firms make up more than 20 percent. HAO is the most liquid small-cap option, with more than $5 million traded daily, at 11 bps spreads.


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