Under The Hood: Waiting On The Chinese Consumer

One of the more popular themes over the past couple of years with regards to emerging markets has been the supposed rise of consumers within those markets. As the economies of Brazil, China, India, etc. have grown, scores of analysts and economists have opined that the trend would lead to rising middle-classes in those countries and benefit companies with consumer discretionary exposure. Well, even economic growth in the emerging markets can slow and that has weighed on the rise of the emerging markets consumer theme a bit in 2011. That's not to say the theme isn't valid, but it probably hasn't been completely validated either. At least not yet. However, longer-term investors can and probably should take advantage of this trend and when they do, they should skip the noise of other markets and head straight to China. That means embracing the Global X China Consumer ETF CHIQ, this week's “Under The Hood” candidate. CHIQ is now almost two years-old and quiet as it is kept, this fund has over $133.5 million in assets under management. With an expense ratio of 0.65%, CHIQ is home to 40 stocks spread across various discretionary sub-sectors. Retail names account for over a quarter of CHIQ's weight. Food and autos get allocations of almost 20% and 19%, respectively. Consumer services and household goods both check in at over 12.5%. Health care and beverage names account for the remaining 10% of CHIQ's sector exposure. As is par for the course with China-specific ETFs, CHIQ only offers exposure to securities that foreign investors can trade, so there are no “A” shares featured in this ETF. In terms of performance, CHIQ is down almost 17% year-to-date. That barely lags the performance of the iShares/FTSE China 25 Index Fund FXI, the largest China-specific ETF. But CHIQ has also handily outperformed the Guggenheim China Small-Cap ETF HAO. Even after a stout October rally, CHIQ has room to run. Should resistance around $15.50 fall, CHIQ an run back to its 200-day line around $17 and then make a stab at $19. Bull case: Emerging markets come back into vogue. Europe doesn't generate any more negative news. Investors look for non-U.S. consumer discretionary plays. Bear case: China continues monetary tightening and/or Chinese economic continues to disappoint.