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One Way You Can Prepare For A China Rebound

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March 8, 2016 7:32 am
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One Way You Can Prepare For A China Rebound

On a year-to-date basis, Chinese stocks and the relevant exchange traded funds have been dogs. Those trials and tribulations could be set to intensify as foreign currency reserves in the world's second-largest economy continue dwindling, albeit at a slower pace.

"The People's Bank of China said Monday that its foreign-exchange reserves fell by $28.57 billion from the previous month, to $3.202 trillion, following a decline of $99.5 billion in January. It marked the fourth consecutive monthly decline, with the reserves reaching their lowest level since December 2011," according to the Wall Street Journal.

For those insistent upon readying for a rally in Chinese stocks, the WisdomTree China ex-State-Owned Enterprises Fund (NASDAQ: CXSE) is an ETF to consider. The WisdomTree China ex-State-Owned Enterprises Fund debuted in mid-June, replacing the WisdomTree China Dividend ex-Financials Fund as the latest emerging markets ETF to overtly avoid state-owned enterprises (SOEs).

Playing The Rebound

Underscoring the volatility that comes along with Chinese stocks, CXSE is up more than 11 percent over the past month, but still down more than 11 percent year-to-date. CXSE follows the WisdomTree China ex-State-Owned Enterprises Index.

Related Link: 3 Ways To Play China's Increased Defense Budget

"China's markets are down precipitously since last April, judging by the FTSE China 50 Index, which is down about 39% since April 30.1 Currently, the largest sector exposure in the FTSE China 50 Index is Financials at 51.6%. This includes many state-run banks, which make up three of the top five holdings.2 While many investors might like the valuations on these stocks (such as the low price-to-earnings ratios [P/E] and high dividend yields), we don’t consider these to be part of the longer-run growth opportunity set of China," said WisdomTree Research Director Jeremy Schwartz in a new note.

Not Focused On Financials

Since it excludes state-run companies, CXSE allocates just under 20 percent of its weight to the financial services sector, a group that usually dominates traditional China ETFs. Additionally, the ETF features no energy exposure. Conversely, technology and consumer discretionary names combine for nearly two-thirds of the ETF's weight.

Said another way, CXSE is home to some of the most glamorous Chinese names, including JD.com Inc. (NASDAQ: JD), Baidu.com (NASDAQ: BIDU) and Alibaba Group Holdings Ltd. (NYSE: BABA).

"We believe investors should not just think about tax planning near the year-end. Anytime there are significant pullbacks in the market, there is an opportunity to rotate into strategies that may offer better exposure to the asset class," adds Schwartz. "We think the ex-state-owned enterprises version of China represents a meaningful improvement in exposure to China. This could be good timing for the opportunity to tactically book a loss while rotating into this strategy."


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