There Are Good Reasons Why This China ETF Can Stay Hot

The Global X MSCI China Consumer Discretionary ETF (CHIQ) is up 16% year-to-date and like so many of its US-focused counterparts, the Global X ETF is benefiting from the move to online retail, a shift hastened by the coronavirus pandemic.

CHIQ’s underlying index “incorporates all eligible securities as per MSCI’s Global Investable Market Index Methodology, including China A, B, and H shares, Red chips, P chips, and foreign listings, among others,” according to Global X.

Data confirm the utility of CHIQ as more Chinese consumers embrace e-commerce.

“Online retail sales of goods will account for an increasing share of total retail sales, a trend that will be irreversible,” said Fitch Ratings. “Fitch expects the ratio of e-tailing sales to total retail sales (goods only) to climb in the rest of 2020, after hitting a historical high of 26.5% in 5M20 (monthly record high of 29.7% in March 2020). The ratio rose by 4.9pp, 5.2pp, 5.3pp, and 5.3pp YoY in 2M20, 1Q20, 4M20, and 5M20, respectively. This compared with increases of 4.0pp in 2018 and 2.6pp in 2019, indicating that consumers have shifted towards e-tailing faster during the COVID-19 crisis.”

Call on CHIQ

E-commerce is being touted as a beneficiary of the shelter-in-place lifestyle being experienced across the U.S. and some parts of China, but even as the latter says it’s notching fewer coronavirus cases and gradually reopening vital parts of its economy, online retail is poised to benefit.

Some recent data points have shown signs of softness in the world’s second-largest economy, but Beijing is also taking steps to prop up consumption and the local economy. China has been looking to increase internal consumption to reduce the economy’s sensitivity to exports, and those efforts appear to be paying dividends. While some data points indicate the Chinese economy and consumer spending are slowing, policymakers remain proactive.

“China had a low e-tailing penetration rate of 49% of the total population at end-2019 versus over 60% for most developed countries, largely due to China’s lower urbanization rate of only 61%. The Chinese government aims to increase the urbanization rate to developed nations’ levels by 2050, which will boost demand for online shopping,” according to Fitch.

Based purely on sheer size, China’s Internet and mobile phone markets are substantially larger than those in the U.S. Additionally, brick-and-mortar infrastructure is slack in China, a sign that up-and-coming Chinese consumers are adept at and prefer to buy online. Importantly, CHIQ components are taking steps to lure buyers at a trying time for the world’s second-largest economy.

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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.