3 China ETFs That Survived The Recent Slump

After delivering a phenomenal return in the first half of 2015, China A-shares sand ETFs saw their worst ' weekly drop ' in seven years last week. The space had been investors’ darling since last year on growing hopes for policy easing (read: Policy Easing Puts China ETFs in Focus).

Notably, downbeat economic data kept coming out of China for quite some time now, with the GDP growth rate falling to 24-year low in 2014 and credit crunch concerns, a property market slowdown and persistently lagging manufacturing sector adding to policy makers’ concerns.
To inject fresh blood into the ailing economy, the People's Bank of China (PBOC) has gone into an accommodative policy mode since last year, having cut interest rates thrice in just six months, announcing a mini stimulus package mainly targeted at railways and other construction investment, declaring a tax relief for small enterprises and so on.
Special attention was paid to shore up the country’s rural sectors as policy makers focused on domestic consumption rather than spurring exports. However, as all these measures have proved insufficient to boost the anemic economy so far, speculations over further policy easing became stronger.
This sentiment attracted foreign investors to pour money into the stocks of the region, which led the best-performing China A-Shares ETF Market Vectors ChinaAMC SME-ChiNext ETF (CNXT ) to return around 90% so far this year.

Sell-Off Takes a Bite Out of Chinese Securities 

After such a steep rise, Chinese stocks were definitely due for a correction. Chinese securities' regulators also warned retail investors at a regular interval about the market’s overvaluation status and rolled out a host of measures including tightening of rules for margin lending, which led to sell-offs.

Last week’s correction was also the result of new tightening steps on margin lending.  Moreover, a flurry of IPOs, which were scheduled to hit the market last week, threatened market liquidity and triggered the sell-off, per CNBC. CNXT was off as much as 12.3% last week (read: 4 Buy Ranked China A-Shares ETFs Still Worth a Look).

China ETFs Surviving the Correction 

Against such a backdrop, investors might want to know about if there were any exceptions in the China equities ETF space which managed to stay afloat in the stock carnage. Below, we highlight three ETFs which were able to wait out the volatility last week and could be in focus should there be any repetition of Chinese market correction going ahead.

Investors should note that most of the winners hail from the H-Shares space, which is trading at a compelling valuation at present unlike A-shares (read: Cross the Wall of China, Invest in Hong Kong ETFs).

iShares MSCI Hong Kong Index (EWH)

For a broader exposure to the Hong Kong market, investors should consider EWH as it is the longest standing and most popular ETF tracking the Hong Kong market. The fund looks to track the MSCI Hong Kong Index.

This $3.79 billion-ETF is invested in a small basket of 40 companies trading in the Hong Kong equity market. The fund appears to be highly concentrated in the top 10 stocks. Real Estate (27.94%), Insurance (18.62%) and Utilities (10.96%) are the top three sectors of the fund.

The fund charges 48 bps in fees. The fund was up 2.2% last week (as of June 19, 2015). So far this year, the fund has added about 16%. The fund has a Zacks ETF Rank #3 (Hold).

iShares MSCI Hong Kong Small-Cap ETF (EWHS)

This is a small cap centric fund. It is unpopular and less liquid having AUM of $8.9 million and average daily volume of about 12,000 shares. The fund tracks the MSCI Hong Kong Small Cap Index and charges 59 bps in annual fees.

Holding 104 stocks, the product does a decent job of spreading out assets as each company holds less than 4% share. However, it is slightly concentrated from a sector look as Consumer Discretionary and Financials take about 30% of the basket each. The product was up 1.6% last week and has a Zacks ETF Rank #3.

iShares MSCI China Small-Cap ETF (ECNS)

The fund looks to track the MSCI China Small Cap Index and offers exposure to the performance of stocks in the bottom 14% by market capitalization of the Chinese equity securities markets, as represented by the H-Share. The fund is an overlooked choice with just $53.5 million in assets and trading with daily average volumes of 25,000 shares a day (read: Top ETF Performers of May).

This Zacks ETF Rank #3-fund charges 62 bps in fees. As much as 70.2% of the stocks hail from China while the rest belongs to Hong Kong. The fund is heavy on Consumer Discretionary (21.2%) followed by Industrials (16.6%), IT (15.8%) and Financials (15.3%). ECNS has low company-specific concentration risks with no stock holding more than 1.21% of the basket. The fund was up 0.6% last week (as of June 19, 2015).

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