Don't Go Looking For Love (Or Value) With These ETFs
It could be the very definition of a value trap. The Shanghai Composite, the benchmark equity gauge for mainland Chinese stocks, has plunged over the past year. However, that does not mean Chinese A-shares are inexpensive. Rather, the opposite is true.
“Even after a 40 percent tumble in the Shanghai Composite Index over the past 12 months, valuations for China’s domestic A shares are three times as expensive as every other major market worldwide. The median price-to-earnings ratio on the nation’s exchanges is 59, higher than that of U.S. technology shares at the height of the dot-com boom in 2000,” according to Bloomberg.
That means stocks on China's mainland trade for more than triple the multiple found on the S&P 500 and more than five times the price-to-earnings ratio found on the MSCI Emerging Markets Index. That also means that if index provider MSCI proceeds with adding A-shares to its emerging markets indexes, benchmarks that previously looked attractive on valuation may no longer have that allure as A-shares enter the fold.
All Aboard, ASHR
The Deutsche X-Trackers Harvest CSI 300 China A-Shares ETF (NYSE: ASHR), the largest A-shares ETF listed in the United States, has performed even more poorly than the Shanghai Composite over the past year. During that time, ASHR, which tracks the CSI 300 Index, is off nearly 56 percent. ASHR's underlying index trades at a discount to the Shanghai Composite, according to China Securities Index Co. data.
“Potential catalysts for gains include this month’s MSCI Inc. decision on whether to include mainland shares in its international indexes and the anticipated start of an exchange link between Hong Kong and Shenzhen,” according to Bloomberg.
Checking Out CHAD
However, these catalysts have been well-known for some time and could only have a muted impact. If that is the case, the Direxion Daily CSI 300 China A Shares Bear 1X Shares (NYSE: CHAD) could enjoy some more time in the spotlight.
CHAD, which debuted last year and was one of 2015's most successful new ETFs, aims to deliver the daily inverse performance of the CSI 300. While a compelling option to hedge long positions in ASHR and the other A-shares ETFs tracking the CSI 300 or as an outright bearish play, CHAD is not perfect. Due to the derivatives used in making this fund click, it is up “just” 9.7 percent over the past year.
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