Exchange-traded funds focused on China have taken a pounding this year amid trade tensions and a cooling of the Chinese economy. Some fund managers, however, see the declines as a short-term blip, saying there are reasons for optimism about the investments.
China-focused ETFs offer U.S. investors exposure to various aspects of the Chinese economy, but almost all have struggled this year. Among the top-10 largest China-focused ETFs by assets under management, declines have ranged from almost 8% to about 37% this year through November.
In fact, only one China-focused ETF is up this year, according to Ben Johnson, director of global ETF research at Morningstar, and that is the $3 million Global X China Energy ETF (CHIE), with a gain of 8.59% through November. Mr. Johnson attributes that to the relatively strong performance of the country’s energy sector compared with the broader Chinese stock market.
The performance of China-focused ETFs “undeniably reflects what’s happening in global trade discussions,” says Luke Oliver, head of ETF Capital Markets, Americas, at DWS Group, which runs Xtrackers Harvest CSI 300 China A ETF (ASHR), a $1.14 billion fund that is down about 25% year to date through November. China-focused ETFs initially got a boost when the U.S. and China announced a trade truce at the G-20 summit, Mr. Oliver says, but the funds gave back gains, as did the broader market, amid uncertainties over how the countries could work out several thorny issues within three months.
Trade, however, isn’t the only factor affecting China-focused ETFs, according to Mr. Oliver, who points to the selloff in U.S. stocks in October that was felt around the globe, along with domestic factors in China.
Indeed, Matthew Bartolini, head of SPDR Research at State Street Global Advisors, says deteriorating trade relations with the U.S. have coincided with a slowing of the Chinese economy after years of skyrocketing growth. That, he says, is hurting growth expectations for many Chinese companies. The $971 million SPDR S&P China ETF (GXC) is down almost 13% this year through November.
Still, both Mr. Oliver and Mr. Bartolini are upbeat about China’s prospects particularly if trade tensions ease. So is Chris Dhanraj, head of iShares investment strategy at BlackRock Inc., who says there are “large opportunities for investors in China.” BlackRock runs a number of China-focused funds, including the two largest by assets under management: the $5.84 billion iShares China Large-Cap ETF (FXI), which is down 7.76%, and the $3.79 billion iShares MSCI China ETF (MCHI), down 13.21% through November.
Mr. Dhanraj points to Beijing’s Made in China 2025 program—which aims to make Chinese manufacturers a dominant force in high-end technologies like quantum computing and artificial intelligence—as an example of a potential driver of growth in coming years.
"A huge part of the appeal for China ETFs is ease of access,” Mr. Dhanraj says. “Global investors’ ability to access China, and the long-term opportunity that it presents, is not changed by trade tensions.”
This could be a strategic entry point for investors, says Jonathan Krane, founder and chief executive officer of KraneShares ETFs, a China specialist that operates a range of funds, notably the $1.77 billion KraneShares CSI China Internet ETF (KWEB), down almost 26% this year through November, after surging almost 70% in 2017. The market decline means that many Chinese companies are available at attractive valuations, he says. “The market has come down, but the fundamentals are still there,” he says.
China’s growing technology market has attracted a number of new players, including the first China-specific ETF focused on blockchain technology. The $1.92 million Reality Shares Nasdaq NexGen Economy China ETF (BCNA), launched by Blockforce Capital, has fallen around 19.94% since its inception on June 20, according to Morningstar data. But Blockforce Capital CEO Eric Ervin remains bullish on the sector’s future—Chinese companies are leading the world in filing blockchain-related patents, he says—and on China’s economy at large.
“The market’s reaction to the trade talk has been a little overdone,” Mr. Ervin says. While a trade war won’t affect many of the businesses in China’s blockchain market, there still has been a significant fall in stock valuations, he says. “This is what investors live for—an opportunity to take advantage of market inefficiencies.”
U.S. investors should note that while China looms large in the global economy, it represents a small portion of the investible opportunity set, representing just over 3% of the value of the MSCI All-Country World Index, says Morningstar’s Mr. Johnson. That means Chinese equities have a small place in a balanced portfolio. Still, in an increasingly interconnected world, strained China-U.S. relations are a serious concern, Mr. Johnson says, no matter where a company is based.
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