‘Ex’ Marks The Spot For This China ETF

August 6th at 7:30am by Tom Lydon

When mainstream China ETFs such as the iShares China Large-Cap ETF (NYSEArca: FXI) and the SPDR S&P China ETF (NYSEArca: GXC) struggle, there is a good chance that the financial services sector is playing a part in those woes.

It has been a common theme nearly as long as China ETFs have been popular with investors: Many of the largest, more liquid China funds are too heavily exposed to Chinese banks, brokers and insurance firms. FXI’s current weight to the financial services sector is 52.3%. GXC, which looks good by comparison, is still by no by no means light on financials as the group represents nearly a third of that fund’s weight. [SHIBOR Woes Could Slam These ETFs]

Then there are the China ETFs that have remained durable throughout the slump that has plagued funds like FXI and GXC. Funds such as the PowerShares Golden Dragon China Portfolio (NYSEArca: PGJ) have thrived because of a resurgence in Chinese Internet stocks. Investors looking to pair other Chinese stocks with a tech-heavy China fund while still dodging bank stocks have a credible alternative. [Long, Rough Road for China ETFs]

The WisdomTree China Dividend ex-Financials Fund (NasdaqGS: CHXF), which celebrates its first anniversary next month, is true to its name. It holds no bank stocks and that has been a good thing over the past month as the fund has jumped 8.3%.

The trade off with CHXF is that the ETF is heavy on Chinese energy names, including PetroChina (NYSE: PTR) and Cnooc (NYSE: CEO). Those names have been laggards compared to U.S. oil stocks this year and CHXF’s 25.1% weight to energy sectors has played a part in the fund losing 15.5% year-to-date. Clearly, that is not a performance to brag about, but it is modestly better than FXI’s 16.4% decline.

CHXF does share at least one thing in common with some of its rival China ETFs: Attractive valuations. The WisdomTree China Dividend ex-Financials Index, CHXF’s underlying index, had a P/E ratio of 10.4 as of mid-July compared to 11.4 on the MSCI Emerging Markets Index and well below the P/E ratios found on the S&P 500 and the MSCI EAFE Index, according to WisdomTree data. [Lowest P/E Ratio Markets in the World]

The index’s price-to-cash flow ratio of 6.28 is also comparable to that found on the S&P China BMI Index, GXC’s underlying index.

CHXF’s other large sector weights include 15.25 to industrials, 14.6% to telecom and 11.7% to staples, indicating it will take some combination of those groups and energy stocks to drive the fund higher assuming China ETFs rebound in earnest in the latter half of this year.

WisdomTree China Dividend ex-Financials Fund

 

ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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