This China ETF Could Have a Strong Q2 Comeback | ETF Trends

Investors bargain hunting for equities that could see a comeback in the second quarter of 2022 may want to give Chinese equities a closer look. While they suffered in 2020 due to the pandemic and 2021 due to the Evergrande Crisis, 2022 could be different.

“The Chinese economy is struggling but it’s … not in serious trouble,” said Derek Scissors, chief economist at research firm China Beige Book.

“What China saw in Hong Kong, with Hong Kong doing very well against Covid until 2022 and then the elderly population in Hong Kong being hit, that is much more important to them,” Scissors said. “From China’s standpoint, the economy is not great but it’s tolerable and a rural Covid wave would be intolerable.”

A China ETF With a Discerning Screener

Exchange traded fund (ETF) investors looking for an opportunity to play a comeback can look at the First Trust China AlphaDEX Fund (FCA), which seeks investment results that correspond to the NASDAQ AlphaDEX® China Index. The index employs the AlphaDEX® stock selection methodology to select stocks from the NASDAQ China Index that meet certain criteria.

The selection process as outlined by First Trust on its product website:

  • Each stock receives the best style rank from the previous step as its selection score.
  • The top 50 stocks based on the selection score determined in the previous step comprise the “selected stocks.” The selected stocks are divided into quintiles based on their rankings, and the top-ranked quintiles receive a higher weight within the index. The stocks are equally weighted within each quintile.
  • Each stock is then tested in order of its selection score rank to check if the weight assigned to that stock is outside the sector weighting constraints, which are set at 15% above the benchmark weight.
    • If the weight assigned to the stock, when added with the weight assigned to all higher-ranking stocks in its sector, is greater than the constraint, then the stock’s weight is lowered to the highest rank in the next quintile. Stocks previously lower in rank then move up one rank. Such stocks in the lowest quintile that violate a constraint are removed from the portfolio and replaced by the highest-scoring stock not originally selected, subject to sector constraints. This process continues until all the sector weightings meet the constraint.

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