Are China ETFs Heading to Higher Heights This Summer?

For investors who are unsure of whether they should turn on the risk dial and give emerging markets a go may want to look at China first. The second largest economy is benefitting off the recovery from the coronavirus pandemic, which could help fuel China exchange-traded funds (ETFs) further to higher heights.

The move to China ETFs has been readily apparent given the strong upside movements in the country’s major indexes. Per a CNBC report, a number of retail investors “flooded the Chinese stock market on Monday, driving the Shenzhen Composite to highs not seen since 2015 and the Shanghai Composite back to 2018 peaks. Some market analysts cited an editorial in state-owned financial outlet China Securities Journal about the importance of building a “healthy bull market” as a partial reason for the rush.”

China’s government is rallying its citizens around investing in its own markets, which is giving the indexes an added boost. This should make for an interesting play in China ETFs this summer.

“Turnover has increased,” said David Mazza, Direxion’s head of product. “Now, the authorities are sort of encouraging Chinese retail to get involved with the stock market again, which has sort of been a sleepy exposure for a little while. So, now, seeing China come back is getting very interesting from an equity market perspective.”

Broad-Based EM Alternative

As opposed to a pure China play, ETF investors can also get broad exposure to emerging markets via broad-based ETFs versus single-country exposure. Detractors of EM assets might underscore the potential for high volatility, particularly during a market downturn—something that’s definitely apparent during the height of coronavirus fears in March where EM assets plummeted.

As such, one fund to consider for broad-based emerging markets exposure, but with less volatility risk is the FlexShares Emerging Markets Quality Low Volatility Index Fund (QLVE). QLVE seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Northern Trust Emerging Markets Quality Low Volatility IndexSM.

The underlying index is designed to reflect the performance of a selection of companies that, in aggregate, possess lower overall absolute volatility characteristics relative to a broad universe of securities domiciled in emerging market countries. Under normal circumstances, the fund will invest at least 80% of its total assets in the securities of the underlying index and in ADRs and GDRs based on the securities in the underlying index.

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