ETF Of The Week: Small Cap China Fund Shines

Lately, China equities have been on a tear. Buoyed by investor optimism over thawing U.S.-China relations, the CSI 300 Index, a benchmark of the 300 largest stocks trading in Shenzhen and Shanghai, rallied 29% in the first quarter of the year. On Thursday, the index struck a one-year high.

So it's probably no surprise that 12 of the top-20-best-performing ETFs so far of 2019 are China equity ETFs, including many small- to midcap ETFs or narrow sector funds (read: "Top Performing ETFs Of The Year").

The best-performing among these is the $38 million VanEck Vectors ChinaAMC SME-ChiNext ETF (CNXT). Year-to-date, CNXT has risen an eye-popping 44%, nearly triple the rise seen in U.S. blue chips:

Source: StockCharts.com. Date range: Jan. 1, 2019 – April 4, 2019.

Under CNXT's Hood

CNXT tracks 100 of the largest and most liquid stocks on the Shenzhen Stock Exchange's SME and ChiNext boards; the SME board focuses on small- and medium-cap enterprises, while ChiNext is a Nasdaq-style board geared toward fast-growing stocks.

As a result, CNXT's benchmark tilts toward smaller stocks and startups. Unlike many other Chinese equity ETFs, which are dominated by financials, 29% of CNXT is allocated to tech stocks, while consumer cyclicals and noncyclicals together comprise another 22%.

About A-Shares

CNXT is one of a next-gen iteration of Chinese equity funds called "RQFII ETFs," which directly hold mainland-listed A-shares via a complex quota system.

Older Chinese ETFs, meanwhile, hold either derivatives or shares of China companies listed on external stock exchanges, such as Hong Kong's. (For more on how China share classes work, read the "Definitive China ETF Guide.")

Until recently, A-shares were relatively off-limits to foreign investors. Lately, however, China has taken steps to increase access to these domestic, renminbi-quoted stocks. Last May, MSCI even added A-shares to its indices; FTSE Russell will follow suit this summer (read: "Coming To An ETF Near You: China A-Shares").

That has perhaps dulled some of the potential impact CNXT and other similar ETFs might have had on the market. Their ability to access A-shares has become less of a distinguishing factor than it once was.

Small But Mighty

Despite its gangbuster performance, CNXT remains small and thinly traded. The fund averages about $1.4 million in daily trading volume, with a spread of 0.17%. Meanwhile, the largest Chinese ETF, the $6.3 billion iShares China Large-Cap ETF (FXI), averages about $1.3 billion with a 0.02% spread.

Still, at a price point of 0.65%, CXNT is among the cheaper pure-play A-shares ETFs, and its 2019 returns to-date remain compelling, helping it to stand out among an already-above-average field.

What's more, should a U.S.-China trade deal materialize, as seems increasingly likely, then Chinese stocks—and CNXT—will likely rise even higher.

Contact Lara Crigger at [email protected]