Amid a contentious trade spate between the U.S. and China, plenty of exchange traded funds have been battered. Some of the worst offenders are China ETFs with specific focuses or niches. For instance, the Global X MSCI China Industrials ETF (CHII) is lower by more than 11% this month, but that fund is looking oversold and could be offering value.
CHII, which has been on the market for nine and a half years, tracks the MSCI China Industrials 10/50 Index. CHII’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.
“Traders are right to worry about the fallout from a trade war between the U.S. and China,” according to a recent note by the ETF Research Center. “The damage to corporate profits—whether severe or barely noticeable—is unknowable. This uncertainty is rightly being reflected in stock prices. But it is also likely that there are bargains among the wreckage, and investors might be able to pick up solid companies at a discount.”
The Case For CHII
When it comes to sector ETFs, many investors solely focus on domestic offerings, but there are other ways to tap sector-level opportunities, including China ETFs.
Investors considering China sector ETFs should note that there is likely to be dispersion among the various sectors, as is the case with domestic sector ETFs.
“Industrials are typically very economically sensitive, and these companies likely offer little respite from a trade war,” according to the ETF Research Center “Rather, the potential upside here comes from valuations, which appear to be pricing in a severe downturn.”
Plus, CHII member firms look inexpensive.
“Specifically, these stocks have a P/E ratio of just 7.9x forward earnings estimates, cheaper than at any other point in the past 5 years,” according to the note. “They also trade at a roughly 10% discount to book value. Finally, dividends appear safe with a payout ratio (dividends per share divided by EPS) of just 27%, so investors can pick up yield of about 3.4% (on the fund’s underlying holdings) while they wait for more typical valuations to return.”
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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.