There is no doubt investors have heard this line before:
"Chinese stocks are cheap."
It has been a familiar refrain as the Shanghai Composite Index
heads to its third consecutive yearly loss. The index now trades
at 11.3 times earnings and the last time Chinese stocks were this
cheap was 2008,
according to Bloomberg
. A year later, Chinese equities had nearly doubled.
Past performance is not a guarantee of future returns and
investors face an interesting dichotomy with some China ETFs.
That being the fact that even the Shanghai Composite has been
sliding, some marquee China ETFs have been rising.
Over the past year, the iShares FTSE China 25 Index Fund
), the largest China-specific ETF, is up 12.7 percent. The
Guggenheim China Small-Cap ETF (NYSE:
) is higher by nearly 10 percent. FXI currently trades at 12.5
according to iShares data
. The iShares MSCI China Small Cap Index Fund (NYSE:
) is slightly more expensive at almost 12.6 times earnings.
Investors that just cannot resist the allure of alleged
bargains in Chinese stocks would do well to consider the
WisdomTree China Dividend Ex-Financials Fund (NASDAQ:
Perhaps the most unique entrant to the China ETF fray in multiple
years, the WisdomTree China Dividend Ex-Financials Fund does
exactly what its name implies. That is
skimp on bank stocks
Actually, CHXF does not skimp on financials because "skimp"
implies some bank stocks are found in this ETF. No bank stocks
are found in CHXF and that does represent a new way to construct
a China ETF. CHXF is not even a month old and already has over $5
million in assets under management, indicating the ETF is off to
a fine start.
More importantly, CHXF serves as a reminder that investing in
an ETF that is over-allocated to just one sector or just a few
stocks defeats the diversification purposes of ETF ownership.
Many China ETFs devote excessive portions of their weights to
financials and/or a small-number of stocks. On the other hand, no
stock can account for more than 10 percent of CHXF's weight and
no sector can garner an allocation of more than 25 percent.
Global X China Consumer ETF (NYSE:
On a valuation basis, the Global X China Consumer ETF is pricy
relative to funds such as FXI and ECNS. CHIQ trades at 17.5 times
earnings and with a price-to-book ratio of almost 1.6,
according to Global X data
. That P/E ratio is even slightly higher than that of broader
emerging markets ETFs such as the iShares MSCI Emerging Markets
Index Fund (NYSE:
A case can be made that CHIQ has started to show signs of
acting like a growth stock and justifying its albeit slight
premium. The ETF is up 5.6 percent in the past month and could be
if China cuts interest rates in an effort to spur economic
Guggenheim China Technology ETF (NYSE:
The Guggenheim China Technology ETF is a perfect example of a low
asset, low volume ETF that is delivering stellar returns. In the
past month, CQQQ is up seven percent and that is despite average
daily volume of less than 6,350 shares and less than $18.6
million in assets under management.
The ETF is home to some Chinese large-caps that U.S. investors
are familiar, including Internet search giant Baidu (NASDAQ:
). That stock accounts for 9.3 percent of CQQQ's weight. Speaking
of Chinese ETFs that are cheap, CQQQ trades at just 12 times
earnings with a price-to-book ratio of 1.4.
For more on China ETFs, click
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