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Believe China is Cheap? Try These ETFs

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October 8, 2012 4:47 pm
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Believe China is Cheap? Try These ETFs

There is no doubt investors have heard this line before: “Chinese stocks are cheap.” It has been a familiar refrain as the Shanghai Composite Index heads to its third consecutive yearly loss. The index now trades at 11.3 times earnings and the last time Chinese stocks were this cheap was 2008, according to Bloomberg. A year later, Chinese equities had nearly doubled.

Past performance is not a guarantee of future returns and investors face an interesting dichotomy with some China ETFs. That being the fact that even the Shanghai Composite has been sliding, some marquee China ETFs have been rising.

Over the past year, the iShares FTSE China 25 Index Fund (NYSE: FXI), the largest China-specific ETF, is up 12.7 percent. The Guggenheim China Small-Cap ETF (NYSE: HAO) is higher by nearly 10 percent. FXI currently trades at 12.5 times earnings, according to iShares data. The iShares MSCI China Small Cap Index Fund (NYSE: ECNS) is slightly more expensive at almost 12.6 times earnings.

Investors that just cannot resist the allure of alleged bargains in Chinese stocks would do well to consider the following ETFs.

WisdomTree China Dividend Ex-Financials Fund (NASDAQ: CHXF)
Perhaps the most unique entrant to the China ETF fray in multiple years, the WisdomTree China Dividend Ex-Financials Fund does exactly what its name implies. That is skimp on bank stocks.

Actually, CHXF does not skimp on financials because “skimp” implies some bank stocks are found in this ETF. No bank stocks are found in CHXF and that does represent a new way to construct a China ETF. CHXF is not even a month old and already has over $5 million in assets under management, indicating the ETF is off to a fine start.

More importantly, CHXF serves as a reminder that investing in an ETF that is over-allocated to just one sector or just a few stocks defeats the diversification purposes of ETF ownership. Many China ETFs devote excessive portions of their weights to financials and/or a small-number of stocks. On the other hand, no stock can account for more than 10 percent of CHXF’s weight and no sector can garner an allocation of more than 25 percent.

Global X China Consumer ETF (NYSE: CHIQ)
On a valuation basis, the Global X China Consumer ETF is pricy relative to funds such as FXI and ECNS. CHIQ trades at 17.5 times earnings and with a price-to-book ratio of almost 1.6, according to Global X data. That P/E ratio is even slightly higher than that of broader emerging markets ETFs such as the iShares MSCI Emerging Markets Index Fund (NYSE: EEM).

A case can be made that CHIQ has started to show signs of acting like a growth stock and justifying its albeit slight premium. The ETF is up 5.6 percent in the past month and could be a prime beneficiary if China cuts interest rates in an effort to spur economic growth.

Guggenheim China Technology ETF (NYSE: CQQQ)
The Guggenheim China Technology ETF is a perfect example of a low asset, low volume ETF that is delivering stellar returns. In the past month, CQQQ is up seven percent and that is despite average daily volume of less than 6,350 shares and less than $18.6 million in assets under management.

The ETF is home to some Chinese large-caps that U.S. investors are familiar, including Internet search giant Baidu (NASDAQ: BIDU). That stock accounts for 9.3 percent of CQQQ’s weight. Speaking of Chinese ETFs that are cheap, CQQQ trades at just 12 times earnings with a price-to-book ratio of 1.4.

For more on China ETFs, click here.


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