Getting Refined With China ETFs

As the largest country exposure in most traditional emerging markets exchange traded funds (ETFs), China is a big reason why these funds are soaring in 2017. But old guard China ETFs can leave investors wanting more.

Weighted by market capitalization, traditional China ETFs and equity indexes are usually heavy on financial services and other state-owned enterprises. Only recently have these products seen increased exposure to high-flying Chinese internet and technology companies. Still, many China ETFs do not do an adequate job of reflecting more refined, faster-growing opportunities in the world's second-largest economy.

ETFs such as the Global X China Consumer ETF CHIQ and the Global X NASDAQ China Technology ETF QQQC allow investors to isolate more lucrative niches of the China investment story without the confines of lumbering banks and energy firms.

Paying Off

The MSCI China Index, which allocates 41.5 percent of its weight to technology stocks, is up an impressive 53 percent this year. CHIQ and QQQC offer their own stellar performance with 2017 returns of 61 percent and 46.6 percent, respectively. Still, enthusiasm is lacking for China ETFs.

“According to Bloomberg, Emerging Market-focused ETFs have brought in nearly $35 billion in net assets this year, representing 33 percent of the total assets in the space at the end of 2016,” said Global X. “China-focused ETFs, on the other hand, have in the aggregate brought in less than $1 billion in net new assets this year, which is equivalent to 12 percent of 2016’s year-end total assets under management (AUM) for the segment.” 

CHIQ, which follows the Solactive China Consumer Total Return Index and is nearly eight years old, offers a play on Chinese consumer trends, including the jaw-dropping growth of Chinese shoppers embracing e-commerce. The ETF allocates a combined 10 percent of its weight to Alibaba Group Holding Ltd. BABA and JD.com Inc.JD.

Focusing On What Matters

Data support the notion that banking on the Chinese consumer is a viable, long-term trend and with China’s "Singles Day" just days away, CHIQ could be worth considering right here, right now.

“To us, the clearest trend in China is the rising spending power of the country’s middle class,” said Global X. “As incomes in China rise, its massive population is expected to increasingly rise to middle class ranks, driving more discretionary purchases of gifts, travel, electronics, and other products and services that historically were exclusive to more niche pockets of the population.”

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