One China ETF to Consider
Earlier this week, China reported first-quarter GDP growth of 7.7 percent. That number missed analysts' estimates calling for growth of eight percent and prompted a brutal sell-off in global commodities and equities markets.
Concerns about growth in the world's second-largest economy had already been weighing on Chinese equities and ETFs this year. Heading into Friday's U.S. session, the iShares FTSE China 25 Index Fund (NYSE: FXI), the largest and most heavily traded China ETF, were down 16.5 percent this year. Even with the benefit of Friday's better than three percent jump, FXI has endured a dismal year. The same can be said of other China ETFs.
Other Chinese data points have been similarly concerning. For example, industrial output in March slowed to an 8.9% year-to-year increase versus 9.9% growth in the January to February period, and first quarter fixed asset investment growth of 20.9% fell from a 21.2% pace in the first two months of 2013, according to S&P Capital IQ.
Still, the research firm is somewhat bullish on Chinese stocks.
"Along with an expectation of an improving Chinese economy in 2013, S&P Capital IQ remains largely positive on China's stock markets, with seasonal buying in China expected to provide a boost to upcoming commodity demand. S&P Capital IQ expects the Shanghai Stock Exchange to move up almost 28% to 2,800 at the end of 2013, from 2,194 April 18," said the firm in a new research note.
S&P highlighted one ETF in the note, the iShares MSCI China Index Fund (NYSE: MCHI), which the firm rates Overweight. While MCHI is just a fraction of the size of FXI ($1.1 billion in assets compared to almost $6.2 billion for FXI), the former has advantages of its own.
First, MCHI has an annual expense ratio of 0.6 percent compared to 0.72 percent for FXI. Second, FXI is often criticized for being home to just 26 stocks and an excessive 56.6 percent weight to the financial services sector.
While MCHI's 40.3 percent weight to financials is by no means light, the ETF is home to 140 stocks, offering broader exposure to the Chinese economy.
S&P Capital IQ has a four-star rating on Cnooc (NYSE: CEO), China's largest offshore oil explorer. Cnooc is MCHI's sixth-largest holding with a weight of 4.67 percent. The stock is FXI's number eight holding at just under four percent.
Increasing the allure of MCHI is the ETF's tradition of outpacing FXI. MCHI is just over two years old, but over the past 12 and 24 months, it has easily outperformed FXI. MCHI has also been the better performer this year and over the past three and six months.
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