Concerns have been building over the Chinese market lately, with many funds tracking the country facing nearly double digit losses over the past three month time period. In fact, the most popular ETF tracking the nation, (FXI - ETF report) , has lost about 7.2% in the past 90 days, suggesting some serious pain for the country’s biggest stocks.
Bad news lately
The main reason behind the country’s slump is the financial sector. Low rates pushed investors into risky ventures, but as short-term interest rates have been rising, it is becoming clear how shaky the Chinese economic foundation really is.
This is especially true now that the country’s economic growth is expected to slow down further this quarter, which is putting extra pressure on lending, and the financial sector in general. Given this situation and the optimism over the U.S. market, many are having a hard time looking beyond domestic shores for investments (See Is the Tech ETF Signaling Trouble Ahead?)
Despite this doom and gloom over the broad Chinese economy, investors have seen a bright spot in the nation; technology. This corner of the market has been relatively immune from the financial woes, and it has managed to prosper despite the overall economic slowdown.
As evidenced by having the world’s fastest supercomputer, Tianhe-2, China is also starting to make a name for itself in the technology world. This is particularly true given that the new system was only expected to be ready in 2015 and came online early to surpass estimates.
Furthermore, companies like Qualcomm and Huawei, have shown considerable interest in China. A leading Internet company, Tencent, has signed a deal to build West China’s first cloud computing center (see Three Tech ETFs Still Going Strong).
The Chinese market is also expected to witness a surge in PC sales. On June 24, Microsoft signed an anti-piracy deal with Samsung and HP to install genuine Windows and Microsoft Office in upcoming systems. This long awaited pact gives positive vibes for investors in the Chinese technology market.
Given this, investors may want to consider Chinese tech ETFs as better plays in the current environment. These funds have arguably better exposure profiles and may be interesting choices in this environment for those seeking to still make a play on the world’s second biggest economy:
GUGGENHEIM CHINA TECHNOLOGY ETF (AMEX: CQQQ)
Launched in Dec 2009, CQQQ tracks the AlphaShares China Technology Index, which measures the performance of the information technology sector in China and Hong Kong.
The fund holds 38 stocks in total and the top ten stocks make up 61% of the fund.
Mid cap comprise 68% while large cap makes up 16% of the fund, suggesting a good dispersion among cap levels. The fund charges 70bps in fees, and has a decent yield of 1.70%, especially considering it is a tech-focused ETF (read New Leadership in the Tech ETF Space?).
The ETF is more volatile compared to the S&P 500 index, but CQQQ has done well nonetheless. CQQQ currently has a Zacks Rank of #3 or ‘Hold’, and has added over 13% in the past three months.
GLOBAL X NASDAQ CHINA TECHNOLOGY ETF: (NASD: QQQC)
Launched in Dec 2009, QQQC replicates the NASDAQ OMX China Technology Index, which tracks the performance of the technology sector in China. QQQC is a large growth fund and has an AUM of $3.3 million.
The fund holds 29 stocks and the top ten holdings contribute 63% to the fund. The market capitalization of the fund in mid caps is 64% and small cap is 20%.
The product charges 65bps in fees, but it has a low yield of .52%. Although the fund is more volatile compared to the S&P 500 and has a high beta of 1.24%, the fund is capable of holding its ground. Currently, QQQC has a Zacks Rank of #3 or ‘Hold’, and has added about 18.9% in the past three months.
The Bottom Line
Negative sentiments about the Chinese markets have strongly impacted the Asian Stock markets. With China’s money market rates easing and the rate falling to 5.73%, the banks are on pins and needles. The Chinese market is also signaling bearish trends, and market experts predict a further slowdown (See The Top Choice in the Tech ETF World?).
Despite this, the technology sector is expected to weather the storms. The space has handily outperformed FXI in the past three months, as well as the S&P 500, and it could remain a decent choice for those seeking to make a play on the shaky market with a solid exposure profile, as evidenced by its recent performance and better sector fundamentals.
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