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Consider China With This ETF

August 26, 2016 1:37 pm
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The Hong Kong-Shenzhen connect remains highly anticipated on the heels of the Hong Kong-Shanghai connect unveiled several years ago. While investor enthusiasm for the Hong Kong-Shenzhen connect is currently seen as tepid, momentum could find its way to this idea, particularly when considering what increased access to Shenzhen stocks brings to the table for foreign investors.


“The $3.2 trillion Shenzhen market, already the world’s seventh largest, could prove attractive to foreign investors because it is where fast-growing Chinese companies that operate in sectors such as technology, pharmaceuticals and clean energy often list,” according to the Wall Street Journal.

Shenzhen stocks have been, by some market observers, dubbed anything from a casino to the Wild West to China's equivalent of the Nasdaq. The bottom line is Shenzhen is home to a lot of Chinese growth stocks, while the bourse lacks many of stodgy, often under-performing state-owned enterprises (SOEs) found trading in Hong Kong and Shanghai.

Related Link: Shenzhen Connect And Its Impact On China ETFs


The Market Vectors ETF Trust (NYSE: CNXT) is an ideal exchange-traded fund with which to tap the potential of Shenzhen-listed fare. 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 VanEck.

“Shenzhen Stock Exchange will add more than 880 stocks for international investors to choose from, and will give them access to ‘New Economy’ businesses — those that are driving technological innovation and other emerging industries, such as clean technology, ecommerce, and pharmaceuticals,” said VanEck in a recent note.

CNXT allocates 35.3 percent of its weight to technology stocks, more than double its weight to industrials, the ETF's second-largest sector exposure. Consumer discretionary and healthcare stocks combine for almost 26 percent of CNXT's lineup.

Additionally, CNXT's exposure to mid- and small-cap companies, particularly at a time when those firms are key drivers of the world's second-largest economy.

“The growth of private SMEs in mainland China may be viewed as quite remarkable when one considers the cost of capital is much higher (as much as 600 bps higher) than for their state owned counterparts. Yet despite the challenging environment, China's SMEs contribute to nearly 60 percent f the country's GDP, 68 percent of exports, and provide 80 percent of employment,” added VanEck.

About half of CNXT's 101 holdings have market values of $1 billion to $5 billion.

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