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Get To Know This China ETF

October 3, 2016 8:15 am
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China ETFs are scuffling this year 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.

However, investors shouldn't be hasty in throwing in the towel on the world's second-largest economy and the Market Vectors ChinaAMC SME-ChiNext ETF (NYSE: CNXT) could be an ideal way with which to play a potential rebound in Chinese equities.

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.

“Market concern has tended to focus more on the rapid increase in leverage that has been seen in China since the global financial crisis. Although we agree that this is a significant issue that will likely necessitate some hard decisions, we think that there are serious differences in the nature of that debt and the management of the economy that could prevent a systemic crisis in the foreseeable future,” said VanEck in a recent note.

CNXT offers another advantage: Low exposure to the sectors that are traditionally home to China's lumbering and often controversial state-owned enterprises (SOEs). Those sectors include energy, financial services and materials. CNXT allocates just 8.2 percent of its combined weight to those groups.

“Much of the debt risk concern is around state owned enterprises, or SOEs. Privately owned enterprises tend not to carry as much debt. According to estimates in a paper published in June 2016 from Shi Kang, an associate professor at Chinese University of Hong Kong, private companies have cut debt to 53% of assets in 2013 from 58% in 2007, while SOEs have seen those figures jump to 62% from 55%,” adds VanEck.

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.

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