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Market Vectors Launches Innovative China ETF - ETF News And Commentary

The sentiment about China is slowly turning positive, given the fact that the economy has lately been divulging some encouraging economic numbers. China grew at a slightly higher-than-anticipated rate during the second quarter.

Moreover, the manufacturing sector is showing a strong recovery with July clocking the fastest pace of growth in 18 months, as per an initial HSBC survey. It seems that the effect of mini-stimulus measures by the government is slowly trickling down.

Given the improving prospects, it seems like a pretty opportune time for issuers to launch China ETFs that focus on the upcoming high flying sectors of the economy, rather than on traditional sectors like Financials and Energy. While a few have tried this approach in ETF form, the latest to follow the trend is Market Vectors.

The issuer has recently launched its new product - ChinaAMC SME-ChiNext ETF under the ticker CNXT. It looks to directly invest in China A-shares through the Sub-Adviser's RQFII quota (read: China A-Shares ETFs Explained ).

CNXT in Focus

The passively managed ETF tracks the performance of the SME-ChiNext 100 Index to provide exposure to the 100 largest and most liquid stocks listed and trading on the Small and Medium Enterprise ("SME") Board and the ChiNext Board of the Shenzhen Stock Exchange.

The index is heavily exposed to the Information Technology and Consumer Discretionary sectors, with the duo occupying a little under half of the total fund allocation. Apart from this, Industrials and Health Care also have double-digit allocations in the fund, with Financials and Energy having the least exposure.

However, the index does a good job of spreading its asset well across individual holdings. None of the stocks have more than a 4% exposure in the fund. Currently, Suning Commerce, Hikvision and Huayi Brothers occupy the top three spots in the fund.

As far as expenses are concerned, the fund charges 68 basis points a year in fees, in line with many other China ETFs. However, as the fund has just been launched, it is expected to have little in assets and volume for the time being and thus bid ask spreads may be wide, at least initially.

How could it fit in a portfolio?

The fund provides a good opportunity for investors to play the A-shares niche, and especially consumer driven sectors like Technology and Consumer Discretionary, in the second largest economy in the world (read: 3 China ETFs Surging Higher ).

A gradually improving Chinese economy is expected to provide a great boost to these cyclical sectors. The credit of course goes to the Chinese government to bring its economy back to health.

Some of the measures implemented by Beijing included the introduction of business tax breaks, targeted credit easing for some banks, incentives to encourage lending in rural areas and specific infrastructure outlays.

Moreover, the fund provides investors exposure to privately owned small and medium-sized enterprises, which are believed to be the main drivers for the recent technological innovation and economic growth in China.

Competition

There are a few interesting competitors to this fund though, as a couple of other products on the market also avoid heavyweight sectors like Financials and Energy (read: China A-Shares ETF from KraneShares Hits the Market ).

Among the China A shares ETFs, CNXT might face competition from some recently launched funds like db X-trackers Harvest CSI 500 China A Shares Small Cap Fund ( ASHS ) and KraneShares Bosera MSCI China A ETF ( KBA ), which too tilt towards Industrials, Technology and Consumer Discretionary. However, these recently launched products are yet to gain popularity and are also quite illiquid.

Apart from these, there are other broad China equities ETFs with a similar focus. In particular, the comparatively more popular PowerShares Golden Dragon China Portfolio ( PGJ ) could be a rival with its nearly 50% allocation to Technology (see all Asia-Pacific (Developed) ETFs here ).

Small cap funds like China Small Cap ETF ( HAO ) and iShares MSCI China Small-Cap ETF ( ECNS ) could also be competitors as they too have the same sectors like CNXT has in their top three list.

Bottom Line

This might be a good time for issuers to come up with China focused ETFs. With a supportive government inclined to clear bottlenecks and infuse the economy with further growth, China looks to be back on track.

Also, the fund's focus on the new and upcoming sectors might help it to gain popularity. Given these positives, it might be worthwhile for investors to bet on the Chinese market now, and at least give the new CNXT a closer look.

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GUGG-CHINA SC (HAO): ETF Research Reports

ISHARS-MS CH SC (ECNS): ETF Research Reports

PWRSH-GL DR HA (PGJ): ETF Research Reports

DB-H CSI500 SC (ASHS): ETF Research Reports

KRANS-BOS CHINA (KBA): ETF Research Reports

MKT VEC-CHINAMC (CNXT): ETF Research Reports

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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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