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A Different Way To Think About China ETFs

May 4, 2017 8:21 am
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A Different Way To Think About China ETFs

Chinese stocks and the corresponding exchange-traded funds are aiding in this year's emerging markets rally, but with stocks in the world's second-largest economy surging, investors should remember the array of differences between various China ETFs.

Challenging Suppositions

For example, the WisdomTree China ex-State-Owned Enterprises Fund (NASDAQ:CXSE) is up 23.1 percent year-to-date, more than double the returns offered by the largest U.S.-listed China ETF. CXSE's out-performance of traditional China ETFs indicates that this China rally is being driven by companies involved with the new China economy, not stodgy, old-guard state-run enterprises such as banks, energy and telecom firms.

Delving Deep Into CXSE

Traditional China ETFs that weight their holdings by market capitalization are usually chock full of government-run companies and that usually means massive allocations to energy, financial services, telecom and utilities sectors or some combination of that group. For its part, CXSE features no energy, telecom or utilities exposure. Financials are the ETF's third-largest sector weight at 13.2 percent, according to issuer data.

China is making overt efforts to upgrade manufacturing and research and development, trends that could benefit CXSE over the long term.

“It means providing long-term support for R&D, building infrastructure for science and technology and commercialization of new technology. Development of emerging industries such as artificial intelligence, new materials and new energy will also be accelerated this year,” said Vania Pang of ICBC Credit Suisse Asset Management in an interview with WisdomTree.

CXSE: Exposure And Lineup

CXSE is levered to more exciting, higher-growth elements of the Chinese economy. For example, the ETF allocates over 61 percent of its combined weight to consumer discretionary and technology stocks. By comparison, the largest US-listed China ETF allocates less than 13 percent of its weight to technology and consumer stocks.

CXSE's lineup includes some of China's most familiar Internet names including Alibaba Group Holding Ltd (NYSE:BABA), Baidu Inc (ADR)(NASDAQ:BIDU) and Ctrip.Com International Ltd (ADR) (NASDAQ:CTRP). That composition underscores CXSE's leverage to China's booming Internet market, which is already the world's largest.

A price-to-earnings ratio of 21.5 on CXSE's underlying is above that of the MSCI Emerging Markets Index, but it also implies a discount to the NASDAQ-100 and some major U.S. Internet ETFs. CXSE's index holds 70 stocks.

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