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China ETFs in Focus on Recent Sell-off

China is hot and soaring among all the other equity markets this year thanks to improving economic growth. In fact, China is leading the global markets, attaining the best-performing country spot in the year-to-date time frame (read: 4 International ETFs Worth Buying at New Highs).

But the incredible run eased somewhat last week as a combination of factors including tightening liquidity and jitters over bond markets led to steep sell-off in the large-cap shares. The blue-chip CSI300 Index tumbled nearly 3% on Nov 23, marking the worst one-day loss in nearly 18 months. The sell-off was again witnessed on Nov 27, with CSI 300 Index dropping 1.3%.

Inside The Pain

Worries over tightening liquidity have built up lately as China took steps to restrict the rapidly growing and lightly regulated market for online micro-lenders to fend off financial risk. The central bank has suspended regulatory approval for setting up of new Internet micro-lenders, sending shares of U.S.-listed Chinese financial firms into a tailspin.

Meanwhile, rising Chinese bond yields spooked investors, dulling the attractiveness of the stock markets as an alternative higher-yielding investment. This is because rising yields will increase financing costs and thus have a negative impact on corporate profits.

If these weren’t enough, the Chinese government’s warning about lofty valuation for one of the nation’s hottest stocks, Kweichow Moutai Co, added to the woes. The government cautioned that shares of China’s biggest liquor maker is rising too fast, creating panic among investors.  

Rounds of downbeat data also took a toll on the stock market. Profits at China's industrial firms slightly cooled down in October, rising 25.1% after jumping 27.7% in September. Meanwhile, debt climbed 23% in September – the fastest pace in four years (read: China Economic Data Disappoints: ETFs in Focus).  

ETF Impact

Quite expectedly, the terrible trading has been felt in the Chinese ETF world too. Funds in this space also saw big losses over the past one week. VanEck Vectors China SME-ChiNext ETF CNXT was the biggest loser shedding 4.8% in the same time frame, followed by declines of 3.3% in Deutsche X-trackers Harvest CSI 500 China-A Shares Small Cap Fund ASHS, and 2.6% each in Guggenheim China Technology ETF CQQQ and Global X NASDAQ China Technology ETF QQQC (see: all the emerging Asia Pacific ETFs here).

CNXT

This fund offers exposure to the largest and most-liquid China A-share stocks listed and trading on the Small and Medium Enterprise (SME) Board and the ChiNext Board of the Shenzhen Stock Exchange by tracking the SME-ChiNext 100 index. It holds 102 stocks in its basket with none accounting for more than 5.74% share. About one-third of the portfolio is allotted to information technology, while industrials, consumer discretionary and materials round off the next three spots with double-digit exposure each. The product is unpopular with AUM of $22.9 million and charges 81 bps in fees per year. CNXT has a Zacks ETF Rank #3 (Hold) with a High risk outlook.

ASHS

This fund offers direct exposure to small-cap China A-share equities and follows the China Securities 500 Index. Holding 512 stocks in its basket, it is widely spread across components with none holding more than 1.03% of assets. Industrials, material, information technology, consumer discretionary and healthcare are the top five sectors with double-digit exposure each.  It is often overlooked by investors as depicted by AUM of $24.3 million. The product charges 65 bps in annual fees and has a Zacks ETF Rank #3 with a High risk outlook.

CQQQ

This fund targets the overall technology sector in China and follows the AlphaShares China Technology Index, holding 72 stocks in its basket. It is highly concentrated on the top two firms, Tencent Holdings TCEHY and Alibaba BABA, at 12.5% and 10.8%, respectively. The product manages an asset base of $479.5 million while charges 70 bps in fees per year. It has a Zacks ETF Rank #2 (Buy) with a High risk outlook (read: Be Thankful to These China ETFs This Year).

QQQC

This ETF also targets the broad technology sector and tracks the NASDAQ OMX China Technology Index. It is unpopular with AUM of just $25.5 million and charges 65 bps in annual fees. It holds 39 stocks in its basket with none accounting for more than 8.6% of assets. QQQC has a Zacks ETF Rank #2 with a High risk outlook.

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Alibaba Group Holding Limited (BABA): Free Stock Analysis Report
 
Tencent Holding Ltd. (TCEHY): Free Stock Analysis Report
 
VANECK-CHINAMC (CNXT): ETF Research Reports
 
GUGG-CHINA TEC (CQQQ): ETF Research Reports
 
GLBL-X NDQ CHIN (QQQC): ETF Research Reports
 
DEUTS-XT HV CS5 (ASHS): ETF Research Reports
 
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