Investors looking to access higher growth areas of the Chinese economy while avoiding lumbering state-controlled companies have some ETFs to consider, including the WisdomTree China ex-State-Owned Enterprises Fund (NasdaqGM: CXSE).
CXSE tracks the WisdomTree China ex-State-Owned Enterprises Index (CHXSOE), which tracks Chinese companies that are not state-controlled. State owned enterprises are defined as government ownership of more than 20% of outstanding shares of companies, according to WisdomTree.
By eliminating exposure to China’s state-run companies, the CXSE features scant exposure to banks and energy stocks. In fact, the WisdomTree China ex-State-Owned Enterprises Index has a weight to banks of just 12.60% and barely any energy exposure, according to issuer data.
While CXSE features sizable allocations to fast-growing sectors, that does not mean the portfolios is richly valued. Historical data suggest otherwise.
“We know companies in the SOE universe are growing slower than the non-SOEs. The question is: what is the warranted premium P/E multiple? That is a hard question to answer, but the spread may be more than warranted when looking at the relative change in earnings across the two indexes,” said WisdomTree in a recent note. “When you look at cumulative earnings growth of the two indexes over the last four years, the traditional MSCI China Index has shown zero earnings growth—hence its lower multiple—while our ex- SOE Index has grown earnings over 40% since its inception, based on trailing 12-month earnings figures.”
Performance Matters
Amid the ongoing trade tensions and economic strains, Chinese market gains have been capped. Nevertheless, some Chinese stocks, notably those related to consumer spending, have been rallying ahead of the Lunar New Year break commencing Monday.
For its part, CXSE is up more than 13% this year, putting the fund well ahead of some of the largest traditional China ETFs trading in the U.S.
For slightly higher multiples, investors can tap some compelling risk/reward opportunities with CXSE this year.
“But for a 3-point-higher P/E multiple expressed above, with the tilt to companies growing earnings at faster clips, I think a Chinese tilt to ex-state-owned enterprises reflects an interesting opportunity to capitalize on the most hated asset class of 2018,” according to WisdomTree.
CXSE is not WisdomTree’s first foray into emerging markets ETFs that explicitly steer clear of state-owned enterprises. The issuer also offers the WisdomTree Emerging Markets ex-State-Owned Enterprises Fund (NYSEArca: XSOE).
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