Niche China ETFs Outperforming Giants

April 12, 2017

Niche investing isn’t for everyone, especially when narrow slicing and dicing centers on often-riskier emerging markets. But it’s sometimes worth stopping and taking a look at how some narrower-in-focus funds perform relative to their broader counterparts.

Consider China ETFs. Emerging markets have performed well this year, and among them is China, which, according to a Credit Suisse survey, is one of institutional and hedge fund investors’ favorite country picks for 2017.

Recent headlines have been largely favorable for China investors. This week, President Trump and Chinese President Xi Jinping met for the first time, and CNBC reported the talks were “friendly” and ended with both sides “agreeing to tackle trade imbalances.” There was also a recent pickup in manufacturing activity in China—what many see as an indication that the country is seeing economic growth, at least in the short term.

Wide Swath Of China ETFs

In the ETF space, investors have plenty of choice when it comes to owning China. Some of these choices are broad and popular—funds such as the iShares China Large-Cap ETF (FXI) and the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR).

But there are also plenty of small, more-nichey funds competing in this segment. Here we take a look at some of the best performances among China ETFs in different segments of the market. Each ETF taps a different pocket of the equity universe.

What’s interesting about each of these funds is that they are all small in terms of assets, and they all seem to struggle with liquidity. They are all, also, outperforming FXI and ASHR for investors who can stomach—or afford—the costs to trade these ETFs.

Global X China Materials ETF (CHIM) is up 26.5% year-to-date

CHIM is one of the only ETFs to offer focused exposure to China’s materials sector through a vanilla, market-cap lens. The ETF owns 24 stocks across sectors like steel, metals and mining, precious metals, chemicals and aluminum. It costs 0.65% in expense ratio, or $65 per $10,000 invested.

The biggest challenge investors face with this strategy is liquidity. With only $3.5 million in total assets, CHIM trades poorly, and with wide spreads currently averaging 1.39%, according to our data. This is a strategy where it’s difficult—and costly—to get in and out. 


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