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3 Reasons iShares China Large-Cap ETF Could Rise

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.

Pie chart by author. Data source: iShares .

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 China.

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 S&P 500 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 valuations.

Key takeaways

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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The article 3 Reasons iShares China Large-Cap ETF Could Rise originally appeared on Fool.com.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong , track every pick he makes under the screen name TrackUltraLong , and check him out on Twitter, where he goes by the handle @TMFUltraLong .The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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