What to Expect From China ETFs Post-Lunar New Year
Hong Kong's Hang Seng will be closed for three days next week while the Shanghai Composite will be closed the entire week in observance of the Chinese New Year.
With Chinese data economic data improving, but China ETFs showing signs of wilting, investors are faced with an interesting near-term conundrum: Buy or sell ETFs tracking the world's largest economy?
As participants in the financial markets frequently note, past performance is no guarantee of future returns, but it is worth noting that human behavior does not change and patterns repeat. That is to say it is time to have a look at how some marquee China ETFs have performed immediately following the Lunar New Year.
iShares FTSE China 25 Index Fund (NYSE: FXI) The iShares FTSE China 25 Index Fund is a credible option to start with not because it is the biggest China ETF, but because it is the oldest. That means there are plenty of post-Chinese New Year performances to evaluate. This year will be the ninth time Lunar New Year has been around for.
FXI traded sideways for about the first month after its first Chinese New Year in 2005 and in 2006 the fund made a small gain following that new year celebration. In 2007, FXI dropped a bit after the Chinese New Year, but that dip proved to be a buying opportunity proceeding one of the ETF's best multi-month stretches ever.
As the global financial crisis got going in early 2008, FXI suffered a double-digit loss following the Lunar New Year. The following year, the ETF took a small loss as U.S. stocks were attempting to put in a bottom. In 2010, FXI delivered returns of about 14 percent over the six weeks following the Chinese New Year. The following year was decent as well with FXI jumping from just under $43 to $45.50 in the six weeks following the holiday.
Last year, FXI took a small loss after the holiday, which was a sign of ugliness to come. However, in three of the past four years, the largest China ETF has performed well following the Chinese New Year.
Guggenheim China Small Cap ETF (NYSE: HAO) HAO is the dominant fund among China small-cap ETFs and also offers a decent track record of post-Chinese New Year performances as 2013 will be the sixth for the fund. HAO's first year in business and that was a case of bad timing as the fund slid about 25 percent in the six weeks following that Chinese New Year.
Like FXI, HAO traded lower following the holiday in 2009, but that gave way to HAO more than double from March to August of that year. The following year was decent for HAO as it gained about $2 over the six weeks following the holiday and that would be roughly the loss the ETF took following the 2011 Lunar New Year. HAO gained about eight percent in six week's following last year's Lunar New Year.
Market Vectors China ETF (NYSE: PEK) The Market Vectors China ETF, which uses various swaps and derivatives to deliver investors exposure to China's hard-to-access A-shares market, is an interesting case study even though it has only been around for two Chinese new years. In 2011, PEK was a decent post-holiday performer, but the ETF really impressed last year, gaining 11.7 percent in less than five weeks following the holiday.
While monthly seasonal trends are not easily spotted in China's A-shares market, there "appears to be a pattern of higher returns than average between February and June and lower returns than average between July and January," according to the academic work Seasonality in the Returns, Volatility and Turnover of the Chinese Stock Markets.
That paper refers to the Chinese New Year as the Spring Festival and highlights the notion that the festival meaningful to A-shares returns.
"Returns before the Spring Festival holiday are significantly higher than average. Most of this comes from the trading day before the holiday (measured by the open-to-close return), which, on average, is 0.84% higher than the average daily return. Using close-to-close returns, it appears that returns are also higher than average on the day immediately after the Spring Festival holiday, which is in contrast with evidence for other markets, where post-holiday returns are usually lower," according to the research.
Investors should note the paper, authored by Zhiguang Cao, Richard D. F. Harris and Anxing Wang, was published in 2007 using a data set running from 1994 to 2006.
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