Getting Tactical With Emerging Asia ETFs

Emerging markets stocks and the related exchange-traded funds recently faltered after impressive showings in 2017, but some market participants remain bullish on developing economies, including equities in emerging Asian markets such as China.

“While emerging markets outperformed U.S. equities in 2017, CFRA's Asia-Pacific Investment Policy Committee remains bullish on Asian emerging markets,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a note out Tuesday. “CFRA favorably points to strong business and consumer sentiment and expectations of a continued earnings recovery in the first half of 2018.”

As is often the case with China ETFs, it could be beneficial for investor to take a tactical approach rather than focusing on large- and mega-cap Chinese stocks trading in Hong Kong (H-shares).

Allocating To A-Shares

A-shares are the stocks trading on mainland Chinese exchanges in Shangai and Shenzhen. Previously hard to access for anyone but institutional investors, A-shares are available via an array of ETFs and that number is growing.

The $723.8 million Xtrackers Harvest CSI 300 China A-Shares ETF ASHR is one of the oldest and largest US-listed A-shares ETFs. ASHR holds 315 A-shares stocks.

“The local A share market had historically been untouched by non-Chinese investors and was not included in broad emerging market benchmarks as were Hong Kong listed shares, noted Arne Noack head of ETF product development at Deutsche Asset Management , but that is changing,” said Rosenbluth. “Starting in mid-2018, MSCI will begin to include China A shares to its emerging market indices.”

ASHR is up 6.6 percent year-to-date after surging 33.5 percent last year.

Excluding The State

Many traditional China ETFs are home to lumbering, slow-growth state-run companies. The WisdomTree China ex-State-Owned Enterprises Fund CXSE eschews those companies in favor of higher growth segments of the Chinese economy.

“Luciano Siracusano, WisdomTree's chief investment strategist, explained to CFRA that by excluding companies where the government was looking over the company's shoulder and rather focusing on the private sector, returns for some of his company's emerging market ETFs were enhanced in 2017. Indeed, CXSE, which does not own China Construction Bank for example, rose 80 percent in 2017,” said Rosenbluth.

CXSE allocates over 56 percent of its weight to technology and consumer discretionary stocks.

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