Why This China ETF Is Soaring

With the benefit of hindsight, investors now know that buying China exchange traded funds a month ago was a wise idea. The largest China ETF trading in New York is up nearly 12.5 percent over that span, but more focused funds delivered even better returns.

For example, the Guggenheim China Real Estate ETF TAO is up more than 15 percent over the past month. TAO is not as obscure as rookie ETF investors may initially think. The $14.3 million ETF turns nine later this year, so it has a track record that spans multiple market environments for emerging markets equities and demand for Chinese real estate.

Nearly all of TAO's 61 holdings, 97.5 percent to be precise, are Hong Kong stocks. The ETF, which tracks the AlphaShares China Real Estate Index, has been bolstered this year by Chinese companies gobbling up real estate assets all over the world.

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“Deregulation by the Chinese government has allowed for increased investment allocation by Chinese insurance firms in real estate. Volaitliy in Chinese markets has seen companies eager to splurge on foreign acquisitions ramp up their efforts - but this has also been accompanied with a soaring demand for investment in local Chinese property developers,” said Markit in a new note.

Still, elevated property values and the potential for the bursting of a property bubble in China are seen as two scourges that could plague the world's second-largest economy. So intense has the rally been in Chinese real estate stocks that shorting these names has become a trade few want any part of.

“Adding to the property fever is real estate firms that are borrowing to fund the acquisition of their own shares creating an environment that has become untenable for short sellers. Additionally, a recent four-week rally in shares has lifted markets,” notes Markit.

Even with the recent surge, YAO is not richly valued. In fact, the ETF is rather inexpensive with a price-to-earnings ratio of 6.5 and a price-to-book ratio of just 0.7, according to Guggenheim data. Both numbers are well below the comparable metrics found on broader China and emerging markets funds.