Amid a rally of epic proportions, Chinese stocks and the U.S.-listed exchange traded funds are once again hot stories. Few China ETFs have been hotter this year than small-cap funds.
Up an average of 51% this year, the Market Vectors ChinaAMC SME-ChiNext ETF (NYSEArca: CNXT) and the Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap Fund (NYSEArca: ASHS) are 2015’s two best non-leveraged ETFs to this point in the year.
The Guggenheim China Small Cap Index ETF (NYSEArca: HAO) has not exactly been a slouch, either. Following Wednesday’s 10.6% gain, which happened on volume that was more than 11 times the ETF’s trailing 90-day average, HAO is up 24.4% this year. [China ETFs are Getting Some Love]
HAO has closed higher in seven of the past eight trading sessions, hit a new 52-week high yesterday and is higher by 19.4% over the past week. Said another way, HAO’s move to the upside has been parabolic. It also caught many investors unprepared.
Wednesday’s price action and volume indicate that buyers probably stepped into HAO yesterday, but from the start of March through April 7, $3.8 million was pulled from the ETF. For the three-week period ending April 7, no money was added to or pulled from HAO, according to ETF.com data.
Investors’ lack of appreciation for HAO is confounding. The ETF is neither new (it turned seven in January), nor small to the point of being off-putting (it has $240.1 million in assets under management). Additionally, HAO has a lengthy track record of outperforming China large-cap ETFs. Over the past three years, HAO has outperformed the iShares China Large-Cap ETF (NYSEArca: FXI) by 1,520 basis points while being nearly 200 basis points less volatile. [Proper Application of China ETFs]
Since 2009, FXI has outperformed HAO on an annual basis just twice. Not to mention the small-cap ETF is home to 316 stocks, more than six times the number of FXI’s holdings. And with a price-to-earnings ratio of less than 10 at the end of last year, HAO was less expensive than U.S. small-cap benchmarks. None of that has recently lured buyers.
The nature of HAO’s recent move is such that the ETF is arguably due for a pullback, but that could also mean a buying opportunity. The A-shares rally is compelling investors on China’s mainland to flock to Hong Kong-listed fare.
“On Wednesday, Chinese investors used the entire 10.5 billion yuan ($1.69 billion) daily investment quota for buying Hong Kong stocks under the Shanghai-Hong Kong Stock Connect scheme for the first time; by Thursday morning more than 6 billion yuan ($967.26 million), over half of the daily quota, had already been” exhausted, according to Reuters.
ASHS and CNXT are A-shares ETFs, but the bulk of HAO’s holdings trade in Hong Kong. Another catalyst could lift HAO as well. When Shenzhen is added to the Shanghai-Hong Kong Stock Connect program, Hong Kong-listed small-caps will become eligible for mainland listings. That stoke a flurry of buying of HAO components. [Stock Connect Could Lift China ETFs]
Guggenheim China Small Cap Index ETF
