After a dithering start to the year, exchange traded funds tracking Chinese stocks have come roaring back. So voracious has the rally for China ETFs been that last week’s outflows from the group snapped 12 consecutive weeks of inflows.
Since the start of the third quarter, the iShares China Large-Cap ETF (NYSEArca: FXI) has hauled in $660.2 million while the rival SPDR S&P China ETF (NYSEArca: GXC) and the iShares MSCI China ETF (NYSEArca: MCHI) have added a combined $231 million. [Cash Returns to China ETFs]
The average gain for that trio since the start of the current quarter is nearly 13%, but as these and other China ETFs have previously proven, there is a time and a place for China ETFs. Add to that, tactical application of China ETFs can often prove rewarding.
Brian Singer, fund manager for the William Blair Macro Allocation Fund, told Lewis Braham of Barron’s that he currently prefers FXI and the Guggenheim China Small Cap Index ETF (NYSEArca: HAO) among China ETFs.
FXI is the largest and most heavily traded China ETF. As such, it is a favorite among institutional investors despite criticism of its small number of holdings and evidence to support the fact that FXI has lagged GXC and MCHI over longer-term time frames. FXI will soon change indices, which will nearly double its number of holdings. [Big China ETF Gets a New Index]
Over the long haul, Singer told Barron’s he prefers HAO “because smaller companies are more exposed to the local Chinese economy than large multinationals. Overall, he says the Chinese stock market is priced 25% below his estimate of fair value.”
HAO has jumped 10.5% in the third quarter.
Along with ETFs, such as FXI and HAO, that track stocks trading in Hong Kong, investors have embraced funds that offer exposure to China’s previously hard-to-access A-shares, or the stocks that trade in the mainland markets of Shanghai and Shenzhen.
The Deutsche X-trackers Harvest CSI 300 China A-Shares Fund (NYSEArca: ASHR) is just 10 months and is already a $408.8 million ETF. A-shares ETFs have proliferated with addition of funds such as the KraneShares Bosera MSCI China A-Shares ETF (NYSEArca: KBA). From a valuation perspective, the time is now to give A-shares ETFs consideration. [A-Shares ETFs Standout]
KraneShares Managing Director Brenan Ahern told Barron’s mainland Chinese stocks trade at a 10% discount to their Hong Kong-listed counterparts.
Keeping with the theme of tactical application of China ETFs, with the Alibaba initial public offering imminent, the high-flying KraneShares CSI China Internet Fund (NasdaqGM: KWEB) and its stablemate, the KraneShares CSI China Five Year Plan ETF (NYSEArca: KFYP), will be two of the first ETFs to add Alibaba.
The underlying indices for both ETFs allow for the addition of Alibaba after the stock’s eleventh trading day and with a valuation of around $160 billion at the mid-point of the $60 to $66 offering range, it is reasonable to expect Alibaba will quickly become a significant holding in KWEB and KFYP. [What Alibaba’s Valuation Means for ETFs]
Guggenheim China Small Cap Index ETF
