Look to Chinese ETFs for a Defensive Move in Today’s Volatility

Even with the Dow Jones Industrial Average down 10% to give it its worst single-day performance since 1987, there are still corners of the market to look at amid the coronavirus fears. One of those areas is where the virus originated—China and its country-focused ETFs.

It might seem like a head-scratching strategy to the casual investor, but as the effects of the coronavirus wane, it could pay handsomely to invest in the second-largest economy.

“We’re better off than offshore markets in terms of virus outbreak containment, lower overall valuations, and bigger policy room,” said Dai Ming, a fund manager with Hengsheng Asset Management Co. “Chinese stocks will fare better than global peers despite some short-term pullback.”

^MSCN Chart

^MSCN data by YCharts

While companies can gain access to the largest companies in China via the broad-based iShares China Large-Cap ETF (NYSEArca: FXI), there is one caveat–the majority of the holdings in the guts of the ETF consist of state-owned enterprises where the government prevents full autonomy of these companies.

As such, one ETF to consider is the Xtrackers Harvest CSI 300 China A ETF (NYSEArca: ASHR) as a way for investors to gain exposure to China’s biggest, best and most authentic equities. ASHR seeks investment results that track the CSI 300 Index that is designed to reflect the price fluctuation and performance of the China A-Share market. In essence, it’s composed of the 300 largest and most liquid stocks in the China A-Share market, including small-cap, mid-cap, and large-cap stocks.

Without a majority of its holdings in state-owned enterprises compared to FXI, ASHR provides a more authentic and diversified representation of gaining access to the world’s second-largest economy.

Per a Bloomberg report, “China’s CSI 300 touched a two-year high last week, rebounding as much as 14% from its coronavirus low, as investors took advantage of easier liquidity conditions and cheap funding to bet on some of the most speculative parts of the market. That exuberance had driven the small cap ChiNext Index to a three-year high and stoked a 32% rally in a gauge of technology stocks before global stock declines hit A shares late last month. They’ve now lost 11% and 17% respectively from their February peaks.”

“The global stock rout has hurt sentiment in A-shares, so many are expecting a correction,” said Jackson Wong, asset management director at Amber Hill Capital Ltd. “But there are still some hot corners in the market that speculative money is moving into, including infrastructure and 5G.”

For more market trends, visit ETF Trends.