Year-to-date, Chinese equities and some of the relevant exchange traded funds have struggled. The iShares China Large-Cap ETF (NYSEArca: FXI) is off 1.2%, a performance that lags the better than 4% gained by the iShares MSCI Emerging Markets ETF (NYSEArca: EEM).
China is EEM’s largest country weight at 18.1%. Illustrating the weakness in Chinese stocks this year, FXI is also the second-worst performer among the four major ETFs tracking the BRIC nations. Only the Market Vectors Russia ETF (NYSEArca: RSX) has been worse. [Behind the BRIC ETF Rally]
That does not mean opportunity is lost with China ETFs. The world’s second-largest economy still offers opportunity, particularly for long-term investors. With emerging markets equities inexpensive and Chinese stocks among the most discounted, the time could be right to consider China ETFs while reconsidering that approach with the SPDR S&P China ETF (NYSEArca: GXC).
With $794.4 million in assets under management, GXC is the third-largest China ETF behind FXI and the iShares MSCI China ETF (NYSEArca: MCHI). As is often said of ETFs, size rarely matters and GXC epitomizes that sentiment. Over the past two years, GXC has outpaced both FXI and MCHI. In fact, GXC has more than doubled the 6.9% returns offered by FXI. [Different ETF Avenues to China]
GXC also presents investors with opportunity to capitalize on Beijing’s efforts to lure increased foreign investment by liberalizing Chinese financial markets. [Increased Access to China With ETFs]
“China is liberalizing their financial markets rapidly which allows fast-growing companies to raise capital internationally,” State Vice President and Head of Research David Mazza told ETF Trends. “GXC can own these foreign listings, which is a competitive advantage relative to peers. In addition, the drivers of Chinese economic growth are shifting from investment and exports to a more consumption and technology-oriented economy. GXC stands to benefit from these economic shifts, as it is significantly overweight the technology and consumer sectors relative to its peers.”
Due to increased concern about China’s shadow banking system and worries about corporate debt defaults, sector weights in China ETFs take on increased importance. In other words, lightening up on financial services stocks might not be a bad idea.
GXC’s weight to that sector is 31.2% compared to 56.5% for FXI. As Mazza noted, GXC is overweight technology stocks compared to rival funds. The ETF’s weight to that sector is 19.4%, 1,100 basis points higher than FXI’s tech exposure, according to State Street data.
GXC’s “outperformance is driven by the construction of its index, the S&P China BMI. The index provides exposure to a broad array of Chinese stocks, including Chinese stocks listed on international stock exchanges (aka “N-shares”). N-shares comprise some of the most well-known Chinese companies such as Baidu (NasdaqGS: BIDU) and Ctrip.com (NasdaqGS: CTRP),” says Mazza.
Those two stocks surged earlier this week on speculation a unit of Baidu could acquire Ctrip, the Priceline (NasdaqGS: PCLN) of China.
Despite its ample technology sector exposure, GXC fits the bill as an inexpensive avenue to already discounted Chinese stocks. The ETF has a P/E ratio of just 9.69 and a price-to-book ratio of just 1.51, which represents a substantial discount the five-year average book value on Chinese stocks.
“Chinese equities have attractive long-term fundamentals and relative valuations that are currently trading at a 40% discount to non-Asian developed markets, which may make them an opportunity in the short-term,” added Mazza.
SPDR S&P China ETF
