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Give A Nod To This China ETF

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April 27, 2016 8:56 am
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Give A Nod To This China ETF

It is the second-largest economy in the world, but China has, to some extent, sat out the rally in emerging markets stocks. For example, the iShares China Large-Cap ETF (NYSE: FXI), the largest China ETF trading in the U.S., is off 3.3 percent year-to-date while the MSCI Emerging Markets Index is higher by 7.8 percent.

 

However, China ETFs have started picking up the pace and that includes ETFs tracking the volatile A-shares markets, located on China's mainland in Shanghai and Shenzhen. At least three factors – the weaker dollar, rebounding commodities prices and China's economic recovery – have some market observers waxing bullish about developing world stocks and ETFs.

 

On the note of China's economic recovery, some ETFs are better ways of playing that theme than are others. One in the “better” camp could just be the the once high-flying Market Vectors ChinaAMC SME-ChiNext ETF (NYSE: CNXT). CNXT, which will turn two in July, provides access to a market segment that can be dubbed “China's Nasdaq” and one that was previously hard for foreign investors to access.

 

“Providing access to 1,282 of China's 2,828 A-share listed companies, the SME and ChiNext Boards of the Shenzhen Stock Exchange are crucial players in China's economic evolution, though the number of new enterprise registrations in China (4.4 million in 2015 or a whopping 12,000 a day) far exceeds the breadth of these two platforms. The SME Board, which now serves 782 listed companies, was inaugurated on May 27, 2011 with the objective of 'supporting innovation' with 'many high quality innovative issuers,'” according to a recent Market Vectors note

 

CNXT follows the “SME-ChiNext 100 Index (SZ399611), which tracks the performance of the 100 largest and most liquid China A-share stocks listed and trading on the Small and Medium Enterprise ("SME") Board and the ChiNext Board of the Shenzhen Stock Exchange,” according to Market Vectors

 

Like many emerging markets ETFs, CNXT is not for the faint of heart. In early 2015 when A-shares stocks were soaring, it took CNXT just a matter of weeks to double, but over the past year, the ETF is off 29 percent. However, it is higher by more than 14 percent over the past three months.

 

Bolstering its new China credentials, CNXT devotes 35.5 percent of its weight to technology stocks, more than double the weight assigned to its second-largest sector weight, industrials. However, A-shares are still richly valued compared to their Hong Kong-listed counterparts as highlighted by CNXT's price-to-earnings ratio of 36.4, but there is earnings growth to support that multiple.

 

“Furthermore, companies listed on the SME and ChiNext Boards experienced bottom line growth of 32% and 46% year-over-year, respectively. The IT, consumer discretionary, and healthcare sectors that characterize the 'new economy' all saw double digit percentage increases in profit growth as compared to 2015 performance,” adds Market Vectors.

 


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