What Bubble? China ETFs Soaring To Start 2012 - ETF News And Commentary
February 08 2012 - 6:01AM
Zacks
While many investors are still down about corners of the global
economy, sentiment is downright pessimistic when you talk to most
about China. The country appears to be facing a plethora of issues
on a number of fronts, causing many to bet on a slowdown in the
country this year. These concerns are not without merits either, as
China appears to be approaching a property bubble, inflation is
rather high, and European woes could drag down exports and create
more unemployment, putting more pressure on the country’s
government that could increase unrest.
Yet despite these concerns, the Chinese economy just doesn’t
seem to quit, and has actually been a star performer so far this
year. Inflation has been edging down, Europe appears to
(temporarily) have their problems under control, while the property
issue and the slowing economy look to come in for a soft landing.
Thanks to these factors, as well as more hopes over a stronger
economy, the vast majority of ETFs tracking the country are not
only up, but have posted double digit gains so far this year,
outpacing a variety of other markets, both developed and emerging,
from around the world (read Five ETFs To Buy In 2012).
Although it should be noted that the Chinese bubble could still
burst at some point later this year, investors should be encouraged
that even in spite of such widespread pessimism, stocks in the
country have been able to hold up pretty well. This factor could
give further credence to the idea that China will be able to
navigate its economy lower without too much damage, potentially
making an investment in the country a lower risk play than what
many might think, especially considering current sentiment
regarding the nation.
For investors looking to see which corners of the Chinese
economy have really started off the year on the right foot, we
highlight three of the biggest winners below. All three of these
funds have outperformed broad products targeting the country such
as YAO or FXI, suggesting that bigger gains have been had in the
more niche products (read Forget FXI: Try These China ETFs
Instead). This trend might not continue but investors should
nonetheless be aware of some of China’s biggest winners in light of
the national headwinds but improving global economic
fundamentals:
Guggenheim China Technology ETF (CQQQ) +13.0% YTD
One of the three top performers in China so far this year has
been CQQQ a fund that follows China’s budding technology industry.
It should be noted that this sector is still pretty small and it is
tilted towards large and mid caps, giving it more volatility than
mega cap funds. The product tracks a benchmark of about 40
companies while charging investors 70 basis points a year in fees
for its services (see The Guide To China Bond ETFs).
CQQQ has a relatively concentrated top holdings list as three
securities make up at least 9.2% of the assets, although all of the
top ten make up at least 4%. The fund also does have some minor
levels of exposure to Hong Kong companies as well as putting about
6.5% in companies classified as consumer discretionary and
materials firms. With this focus, the fund has a reasonable P/E
ratio at 12.4 while the P/B is at 1.6, decent levels considering
that the fund has a long terms earnings growth rate of 20% a
year.
Global X China Financials ETF (CHIX) +13.3% YTD
2012 has started off as a great year for financials as a number
of trouble spots are quickly fading to the backburner. This trend
has apparently continued in the Chinese market as well, as CHIX was
one of the two best performing ETFs in the space to start the year.
The fund tracks about 36 companies based in China while charging
investors 65 basis points a year in fees for its services (read Top
Three BRIC ETFs).
CHIX is heavily concentrated in banks (51%), but real estate
(21.9%) and insurance (20%) also take up sizable chunks as
well. In terms of individual holdings, the Global X product
allocates about 10% to each of the following; Bank of China,
Industrial & Commercial Bank of China, China Construction Bank,
and China Life Insurance (CHL), meaning that the fund is relatively
concentrated in its top holdings. However, investors should note
that the product does have pretty favorable valuation metrics as
the P/E for the fund is below 7.5 while the P/B is below 1.5. This
could suggest that CHIX could have further to run should the
Chinese economy remain stable this year and if growth rates remain
relatively high.
Guggenheim China Real Estate ETF (TAO) +14.1% YTD
Shockingly given the broad fears over the Chinese real estate
market, TAO is actually the best performing China fund to start the
year. The product tracks the AlphaShares China Real Estate Index
which looks to measure equities in the real estate sector that are
engaged in some aspect of the business in China or any of the
country’s Special Administrative Regions such as Hong Kong or
Macau. The product holds just under 50 securities in total and
charges investors 65 basis points a year for fees (see Top Three
High Yield Real Estate ETFs).
TAO is pretty well spread out among its individual holdings as
no one security makes up more than 5.6% of the total and all of the
top ten have at least 4.2% of the assets. This suggests that
company specific risk should be pretty low in the fund and that no
one company will dominate the returns of TAO. With that being said,
investors should also note that the Guggenheim fund puts just 25%
of its assets in Chinese securities with that vast majority going
to those based in Hong Kong instead. Still the product has an
incredibly low P/E of 3.8 and a P/B of just 0.6, meaning that deep
value could be present in the sector, even when considering the
recent surge.
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