While they may not have had the best year thanks to rising global inflation and a stronger dollar, emerging markets (EM) can still add a dose of growth as well as diversification to a portfolio heading into the new year. That said, investors may want to give Vietnam a closer look. The macroeconomic environment wasn’t [...]
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Agricultural commodities like soybeans have witnessed a rollercoaster ride with inflation and geopolitical events like Russia’s invasion of Ukraine providing a heavy dose of volatility. Heading into the new year, soybean prices will still hinge upon those factors, but also the production aspect in the country of Brazil. It appears consumers may get a much-needed [...]
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Previewing the kind of insight and analysis that will be on display at Exchange, VettaFi vice chairman Tom Lydon, head of research Todd Rosenbluth, and financial futurist Dave Nadig appeared at the Investment Insights Summit last week. Speaking to what VettaFi does, Rosenbluth said, “I view a lot of what we do from a research [...]
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The Chinese market continues to attract investors from all around the world, lured by comparatively low valuation ratios and the prospect of strong earnings growth. However, it also remains highly volatile and suffered numerous steep losses in 2022. Risk factors this year included:
Contagion in China's real estate market due to the Evergrande credit crisis.
Crackdowns on the Chinese technology sector from the government.
Political risk after President Xi Jinping secured an unprecedented third term in office.
Retail closures due to lockdowns and quarantines from China's strict zero-COVID policy.
Protests against the government's strict zero-COVID policies.
Despite these challenges, investors continue to pour money into Chinese equities. A good reason to do so is based on the country's historically strong performance when U.S. stocks falter. Case in point, from 2000 – 2007 the U.S. market stagnated, while the Chinese market took off.
Currently, Chinese equities have a 0.52 correlation with U.S. markets, which coupled with their high volatility and positive expected returns could make them a good diversifier. Here are three ETFs holding Chinese equities to bet big on a comeback with.
iShares MSCI China ETF (MCHI)
With assets under management (AUM) of $7.5 billion, MCHI is one of the most popular broad-market Chinese equity ETFs available. The ETF tracks the MSCI China Index which holds roughly 630 Chinese equities based on their market-cap weights.
Value investors will quickly notice the low valuation ratios of this ETF. Currently, MCHI has an average price-to-book ratio of 1.59 and price-to-earnings ratio of 11.02, far lower than its U.S. counterparts. While this does look undervalued, it could also be a value trap given that political risk is hard to price.
Currently, the top holdings in MCHI include Tencent at 12.20%, Alibaba at 8.33%, Meituan at 4.79%, and JD.com at 3.18%. Over 31% of the ETF is held in the consumer discretionary sector, with communications and financials coming in second and third. MCHI costs an expense ratio of 0.57%.
KraneShares CSI China Internet ETF (KWEB)
KWEB tracks the CSI Overseas China Internet Index, which holds Chinese equities whose primary business or businesses are focused on internet and internet-related technology. The ETF rallied strongly by 34% over the last month as the Chinese government began to relax its zero-COVID policies.
KWEB is the ETF to buy if you're looking for a concentrated sector play. According to Kraneshares, this sector has great growth potential, with Chinese retail web sales totaling $2 trillion in 2021 compared to $870 billion in the U.S., and online shopping accounting for 25% of retail purchases in 2021.
The top holdings are similar to MCHI with Alibaba, Tencent, JD.com, and Meituan once again making an appearance. However, the sector breakdown is much more focused on consumer discretionary and communication services. Surprisingly, information technology only came in at 2.5%.
Global X MSCI China Consumer Discretionary ETF (CHIQ)
I think the Chinese market sector with the most to gain from a re-opening of the economy and a relaxation of the zero-COVID policies is consumer discretionary. The retail, restaurant, entertainment, and travel companies in this sector have been hamstrung in recent years and are due for a comeback.
An ETF that targets the Chinese consumer discretionary sector is CHIQ, which holds large and mid-cap China A, B and H shares, red chips, P-chips, and foreign listings. Currently, this includes 73 holdings, with names like Yum China Holdings, NIO, and Alibaba making an appearance.
Unsurprisingly, CHIQ is more volatile than its benchmark, with a beta of 1.20 compared to the MSCI Emerging Markets Index. However, its beta compared to the S&P 500 is much lower at 0.42, making it a potentially good diversifier. The ETF costs an expense ratio of 0.65%.
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