Niche China ETFs Outperforming Giants

April 12, 2017

KraneShares Zacks New China ETF (KFYP) is up 16.6% year-to-date

KFYP is a smart-beta approach to China’s total market. The multifactor, tiered ETF is designed to offer investors exposure to Chinese companies that are expected to benefit from China's current Five-Year Plan. Stocks are selected based on metrics such as momentum and free cash flow.

The fund tilts toward technology—a sector of the economy that’s growing a lot—and away from financials, which tend to dominate broad China ETFs.

As with many other niche ETFs, KFYP struggles with liquidity. Trading spreads in this fund are currently averaging 7%. That’s a massive cost investors would face to get in and out of this ETF. Daily trading volume averages just about $7,000.

Launched in 2013, KFYP has $3.4 million in assets, and costs 0.73% in expense ratio. 

Going back 12 months, these funds each shelled out double-digit returns: 

Charts courtesy of StockCharts.com

Risks & Opportunities

China is the second-largest economy in the world, and the biggest emerging market. There’s no ignoring China in an asset allocation plan.

But like many emerging economies, the outlook for China seems to be regularly changing, as risks and rewards get reshaped by domestic themes and ever-changing global trends. Risks abound, as China faces many demand- and supply-side head winds in its pursuit of long-term, sustainable growth.

Earlier this month, Vanguard put out a comprehensive research paper that offers a deep look into what the firm called China’s “tough balance between pace and quality of growth.” That balance hinges, the firm says, on much needed structural reform.

 

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