International ETFs Gain The Most From China Rate Cut

China turmoil has been playing foul in the global markets over the past few months. The crisis deepened early this month when the government devalued its currency, the renimbi, by 2% to ramp up exports. After that, sluggish manufacturing data fueled fears over the persistent slowdown in the world’s second largest economy with its concomitant impact on global growth.

China-led fears have hit stock markets worldwide with matters turning from bad to worse over the past four days. China’s main index plunged nearly 22% in the same period, wiping off trillions of dollars from the Chinese stock market. This represents the worst stock market rout in almost two decades. In order to fight against the malaise and arrest the crisis that rattled the global economy, the People's Bank of China (PBOC) announced another round of monetary easing (read: Best ETF Strategies to Survive Market Turmoil).

The central bank slashed the one-year lending rate by 25 bps to 2.75%, the deposit rate by 25 bps to 1.75% and reserve ratio by 50 bps to 18%. Notably, this is the fifth interest rate cut in nine months.

Market Impact

The move initially injected fresh optimism into the global markets with most benchmarks trading in the green. European stocks rebounded from the heaviest losses since 2008, Asian stocks snapped an eight-day losing streak, and the U.S. stock market opened higher on Tuesday. But the momentum in the U.S. fizzled at the end of the day with the major benchmarks ending in negative territory.

This is because investors are concerned that a fresh round of easing would not be enough to stabilize the Chinese economy and halt a collapse in the stocks. Most analysts believe that China will continue to face a long period of uncertainty that would result in more volatility. This would spread the contagion to the rest of the world and continue to weigh on the global stock markets.

Despite the volatility, international ETFs have gained the most following China’s rate cuts. Below, we have highlighted four products that do not belong to any particular country but provide a diversified exposure to a number of nations (read:5 Low Risk ETFs to Protect Returns Amid Volatility):

First Trust Dorsey Wright International Focus 5 ETF ((IFV - ETF report))

This ETF of ETFs looks to have an enhanced exposure by following the Dorsey Wright International Focus Five Index. The index provides targeted exposure to the five First Trust international ETFs that are expected to have the maximum chance of outperforming the other ETFs in the selection universe. The new portfolio is based on momentum strategies as measured by Dorsey Wright’s definition of relative strength characteristics.

United Kingdom, Switzerland and Germany are the top three countries accounting for 21% share each. In terms of sector holdings, financials dominates the portfolio with 31% share, followed by consumer discretionary (19.5%), industrials (14.6%) and information technology (10.2%). The fund has amassed $707.1 million in its asset base while it charges a steep fee of 1.10% from investors. Volume is good, exchanging more than 740,000 shares a day on an average. The ETF added 1.8% in Tuesday’s trading session (see: all the World ETFs here).

PowerShares S&P International Developed High Quality Portfolio ((IDHQ - ETF report))

This fund provides exposure to high quality stocks based on historical records of earnings and dividends. It follows the S&P International Developed High Quality Rankings Index, holding 395 stocks in its basket. The fund is well spread out across components with none holding more than 0.62% of assets. Japanese firms make for more than one-third of the portfolio while United Kingdom accounts for double-digit exposure.

From a sector look, about one-fourth of the portfolio is allotted to consumer discretionary while industrials, consumer staples, financials and health care round off the top five. The fund is often overlooked by investors as depicted by AUM of $18.3 million and an average daily volume of about 6,000 shares. The expense ratio came in at 0.47%. The ETF was up 3.9% on the day.

PowerShares DWA Emerging Market Momentum Portfolio ((PIE - ETF report))

This fund provides exposure to 101 stocks from the emerging markets that possess powerful relative strength characteristics. It tracks the Dorsey Wright Emerging Markets Technical Leaders Index. South Korea is the top country with 27.6% share, followed by China (15.8%), the Philippines (14.4%) and South Africa (12.8%).  

The product is well spread out across various sectors and securities. None of the sectors accounts for more than 20% share while none of the securities makes up for more than 3.5% share. The fund has managed assets worth $260 million and trades in good volume of 194,000 shares a day on an average. It charges 90 bps in annual fees and gained 2.3% yesterday (read: Emerging Market ETFs Slip to 52-Week Lows).

iShares Asia 50 ETF ((AIA - ETF report))

This fund provides a broad exposure to 51 largest Asian companies by tracking the S&P Asia 50 Index. While it is concentrated in the top firm – Samsung Electronics – at 9.6%, other firms do not hold more than 7.72% of assets. Further, financials and information technology take the top two spots with 40.6% and 29.0% share, respectively, with the other sectors making up for single-digit allocation each.

In terms of country exposure, China accounts for the largest share in the basket at 43.7%, followed by South Korea (19.6%), Taiwan (17%) and Hong Kong (10.9%). The fund has AUM of $357 million and trades in lower volume of 32,000 shares a day on an average. It charges 50 bps in fees per year and has added 3.3% in yesterday’s trading.

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Disclosure: None.

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