Why This ETF Is a Valid China Play | ETF Trends

As has been widely documented, Chinese stocks are rebounding to start 2023, but seasoned investors know that it pays to be judicious in developing economies, including China.

Among the hundreds of exchange traded funds with exposure to Chinese stocks, the WisdomTree China ex-State-Owned Enterprises Fund (CXSE) stands out as one that has the goods to help investors adequately capitalize on upside by Chinese stocks.

As its name implies, the $888.57 million CXSE largely limits exposure to state-owned enterprises. To be precise, the ETF is home to “Chinese companies that are not state-owned enterprises, which is defined as government ownership of greater than 20%,” according to WisdomTree.

Recent data indicate that investors could improve outcomes with Chinese stocks by eliminating or limiting exposure to SOEs.

“On 30 January, China’s (A1 stable) Ministry of Finance published monthly data showing slower revenue growth and a profit decline for state-owned enterprises (SOEs) in the second half of 2022. However, the removal of strict COVID-19 restrictions supports our forecast for a rebound in real GDP growth this year, with significant upside momentum, from 3% in 2022,” according to Moody’s Investors Service.

Indeed, 2023 is barely more than a month old, but regarding CXSE, the proof is in the proverbial pudding, as the WisdomTree ETF is up more than 11% since the start of the year. Additionally, the ETF’s methodology could help limit investors’ exposure to companies with sluggish revenue trends, and there are plenty of those among Chinese SOEs.

“The slowing revenue growth and continued weakness in profitability in H2 reflects stringent COVID-19 lockdowns and property sector weakness that slowed China’s economic recovery. However, the recent removal of strict COVID-19 measures underpins our view of a gradual recovery in consumer spending in 2023. The annual Central Economic Work Conference (CEWC) that concluded on 16 December 2022 signaled a continuation of less restrictive COVID-19 policies and support for the property sector,” added Moody’s.

As the research firm points out, the performance of Chinese SOEs will differ from sector to sector, but the fact remains that for CXSE, the ETF is heavily allocated to the sectors primed to benefit from the reopening of China’s economy.

“SOEs’ financial performance will vary by sector. The relaxation of COVID-19 restrictions will boost consumer spending and restore companies’ investment appetites, which will bolster revenue growth of SOEs, especially for those in sectors hit by weakness in consumer discretionary spending and tourism over the past three years. We are already seeing early signs of a recovery in consumer spending,” concluded the ratings agency.

Consumer discretionary is the largest sector exposure in CXSE at a weight of 34.61%.

For more research, information, and analysis, visit the Modern Alpha Channel

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.