In a world with more than 6,500 different stocks available for
purchase,the sheer number of options can be overwhelming.
Thankfully, exchange-traded funds can make life a bit easier for
the average investor.
Exchange-traded funds, or ETFs, enable investors to buy a basket
of stocks through a single security. Today we're looking at oneof
those popular ETFs, the
iShares China Large-Cap ETF
, and considering three reasons why it could be poised to head
The skinny on the iShares China Large-Cap ETF
Let's start by covering some important ground, including the makeup
of the fund, its investment goal, and its expenses relative to
those of its peers.
The iShares China Large-Cap ETF is comprised of 26 securities
invested solely in Chinese large-cap companies. It seeks to mirror
as closely as possible the investment results of the FTSE China 25
Index and give investors the ability to own a basket of China's
largest stocks. As of the end of last week, more than half of the
fund was comprised of financial stocks. Another 15% was invested in
telecommunications companies, 11.5% went to oil and gas stocks, and
a solitary technology company alone made up more than 10% of the
fund's roughly $5.4 billion in net assets, as you can see
Pie chart by author. Data source:
Comparatively speaking, the iShares China Large-Cap ETF's
expense ratio of 0.73% and annual turnover of 31% are more or less
on par with a number of other China-focused ETFs. It also boasted a
trailing 12-month yield of 1.74% as of the end of July.
Now that we have a good understanding of the makeup of the fund
and its objective -- that is, to provide exposure to China's
largest companies -- let's look at three catalysts that could cause
this ETF to rise.
China's superior growth prospects
Without question, the premier allure of this ETF is the ability to
take advantage of China's superior growth rate compared to other
industrialized nations. China is smack-dab in the middle of its
industrial renaissance, which is seeing success from all ends of
the economy. Sectors from manufacturing down to mining are all
seeing expansion as entrepreneurship grows right alongside the
country's burgeoning middle class.
In U.S. dollars, China gross domestic product has more than
quadrupled from $1.93 trillion in 2004 to $9.24 trillion in 2013.
This works out to average GDP growth of 19% per year and suggests
that China's GDP is equal to roughly 15% of global GDP.
Graph by author. Data source: TradingEconomics.
China is rapidly becoming an economic superpower that still has
the capacity to grow independently due to its rising middle class
and the need for extensive infrastructure build-outs and
improvements within the country. This multidecade opportunity, as
well as the nation's proximity to other rapidly growing emerging
markets in Southeast Asia, makes China a common destination for
investors' money. Investors simply can't find this type of growth
in any other industrialized nation.
Home prices are soaring
Rising prices for newly built homes are generally a positive sign
for any economy or country, but this is especially important for
Most importantly, rising home prices fuel investment in the
housing industry and encourage consumers to buy new homes before
costs rise further. This is crucial for the banking sector in
China, which leans heavily on mortgage loans -- and the interest
from those loans -- to boost profits.
As noted above, more than half of the iShares China Large-Cap
ETF is comprised of financial stocks, meaning the health of the
housing sector is paramount to the fund's success. Even though
year-over-year home-price appreciation has slowed in recent months,
it averaged 3.6% between 2011 and 2014, which is more than
attractive enough to entice investors and home buyers to take the
plunge. So long as this figure is expanding, it implies that banks
are lending and profits are rising.
Graph by author. Data source: TradingEconomics.
It's notably cheaper than the U.S. alternative
As of the end of last week, the
was trading at a trailing 12-month P/E of roughly 16.7. By
comparison, the iShares China Large-Cap ETF was valued at just 14.9
times trailing 12-month earnings at the end of July. This 10%-plus
discount to the S&P 500 may seem negligible on the surface, but
you have to consider the catalysts mentioned above to understand
why the discount could lead to a surge in this ETF.
Over the trailing 12-month period, the average earnings growth
for stocks held within the iShares China Large-Cap ETF was 13.6%.
This is largely due to organic product and service growth. In the
U.S., blended second-quarter growth for S&P 500 companies
totaled just 8.4%, according to FactSet Research -- and this comes
after a near-record number of share repurchases, which artificially
inflate earnings per share.
The iShares China Large-Cap ETF offers investors the opportunity
to buy into a fund with faster growth and a lower trailing P/E
multiple than the U.S.' broadest index. The closing of this
valuation gap could present an opportunity for the iShares China
Large-Cap ETF to rise notably and catch up to premium U.S. stock
The iShares China Large-Cap ETF certainly offers a lot of potential
for investors who are looking for region-specific investment ideas
and don't have the time to research dozens of
companies. Ultimately, the success of this ETF depends on the
health of the housing sector and China's ability to continue to
carry the global economy on its back during turbulent growth
periods. Continuing to succeed in these areas won't be easy for
China, but it's not impossible, either.
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3 Reasons iShares China Large-Cap ETF Could
originally appeared on Fool.com.
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