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As China Rebounds, Others ETFs Join FXI on The Upside

October 19, 2012 7:43 am
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Finally. That might just be the sentiment of some China bulls as stocks in the world’s second-largest economy have started showing signs of life in recent weeks. Amid stabilizing economic growth and compelling valuations, investors have started warming to Chinese equities and ETFs again.

That means plenty of attention is being lavished on the iShares FTSE China 25 Index Fund (NYSE: FXI). FXI has a few things working for it. It is the largest China-specific on the market with $5.2 billion in assets under management. It is home to some of the Chinese companies U.S. investors are most familiar with such as Cnooc (NYSE: CEO) and PetroChina (NYSE: PTR). It is also heavily traded with average daily turnover of 13.4 million shares.

There are two primary strikes against FXI. First, it is only home to 26 stocks, a number hardly reflective of the massive Chinese economy. Second, FXI may be popular, but it has a tendency to lag rival China ETFs.

FXI has flexed its muscle in the past month, gaining almost 8.4 percent. A gain like that in the span of a month is hardly anything to complain, but FXI’s recent strength serves as a reminder there are other funds worth considering on the China ETF block.

EGShares China Infrastructure ETF (NYSE: CHXX)
It did not take long for the market to start pricing in the impact of China’s recently announced infrastructure stimulus plan on CHXX. Still thinly traded (average volume is less than 4,000 shares per day), CHXX’s improving technicalshave lead to some high volume days in recent weeks.

Now, momentum is strong in CHXX and the ETF has outpaced FXI by over 200 basis in the past month. More impressive is the fact that CHXX is up nearly 23 percent since early September.

Over the past month, FXI has outpaced the SPDR S&P China ETF, but GXC is another example of a China ETF with strong technicals. Strong technicals tend to be the reason an ETF moves from flirting with $60 to flirting with $70 in just six weeks.

Those looking to make a long-term better on China should note GXC has a lower expense ratio than FXI and over the past five years, one year and year-to-date, GXC has obliterated FXI in terms of performance.

WisdomTree China Dividend Ex-Financials Fund (NASDAQ: CHXF)
Many China ETFs represent a dividend dichotomy. A fair amount of China’s state-run enterprises pay decent dividends, which have grown over time, but that is not reflected in the yields of major China ETFs. For example, both FXI and GXC yield less than three percent.

To that end, the introduction of CHXF is well-timed. Energy names, which are fair yielders by Chinese standards, account for almost a quarter of CHXF’s weight. The exclusion of bank stocks could prove even more important. Last month, the China Securities Journal reported regulators may pare payout ratios for bank dividends in China so the institutions can retain more capital. That means CHXF is clear of possible dividend cutters. In just one of trading, the ETF has accumulated $18.4 million in AUM.

Global X China Industrials ETF (NYSE: CHII)
China has been trying to reduce its dependence on exports and those efforts to engineer increased domestic consumption have weigh on margins for industrial stocks. Slack economic growth through the first three quarters of this year also dampened the sector’s profits. The sector is also wrestling with overinvestment during China’s boom years.

All of that should be bad news for CHII, but the fund has jumped 12.3 percent in the past month. The calls that Chinese equities are cheap pertain to CHII’s constituents as well. CHII’s price-to-earnings ratio of 11.28 and a price-to-book ratio of 0.87 imply the fund is cheap relative to FXI, which trades at 12.5 times earning with a price-to-book ratio of 1.55.

China’s plans to boost railway spending by 16 percent this could mean more upside for CHII because the ETF devotes more than 15 percent of its weight to railroad stocks.

For more on China ETFs, click here.

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