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China ETFs in Focus on Strong Credit and Trade Data

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Chinese stocks have seen rough trading since the start of the year on weak manufacturing and service activities as well as lack of liquidity. This trend seems to be reversing with strong export growth and record credit growth for January that has boosted confidence in the world’s second largest economy (read: China ETFs Struggle on Weak Data, Bailout Speculation).   
Further, a rise in foreign direct investment (FDI) in China added to the bullish outlook on the nation, suggesting that investors might cycle their portfolio here at least for the short term.
Credit Data
China’s credit was at a record high in January with aggregate financing rising to 2.58 trillion yuan ($425 billion). New loans jumped to the highest level in four years to 1.32 trillion yuan ($217.6 billion) and easily surpassed the Wall Street expectation of 1.1 trillion yuan. Notably, loan disbursement in January was nearly three times that of December.
Record credit growth outweighed the recent concern of slowdown and spread optimism on the country’s short-term growth path. Further, it would help the economy to maintain momentum and limit the risk of financial turmoil from bad loans and defaults, leading to financial stability.
Trade Data
Exports surprisingly jumped 10.6% in January, which is much higher than 4.3% growth in December and the market expectation of 2%. On the other hand, imports rose 10%, up from 8.3% in December and 3% market expectation. As a result, the trade surplus climbed to $31.9 billion in January from $25.6 billion in December (read: ETFs to Watch in the Chinese New Year).
FDI Data
FDI in mainland China rose to 16.1% in January to $10.76 billion, representing a whopping growth from 3.3% in December. Investments in the service sector climbed 57.02% while manufacturing sector investments dropped 21.7%.
Region wise, investments from 10 Asian countries including Hong Kong, Taiwan, Japan and South Korea, as well as United States remained strong, rising 22.2% and 35%, respectively. However, European Union investment fell 41.3% during the month (read: Is Another Great Year Ahead for Japan ETFs?).
Apart from the domestic picture, outbound FDI also rose 47.2% in January, suggesting that the Chinese companies are expanding internationally supporting the country’s growth.
ETFs in Focus
Despite the slow economic growth backed by sluggish manufacturing activity, investors could definitely take a look at the following three Chinese ETFs in order to ride out the surge resulting from this flurry of positive data (see: all the Emerging Asia Pacific ETFs here):
The trio has a Zacks ETF Rank of 2 or ‘Buy’ rating, suggesting that they may continue to outperform in the coming months too.
PowerShares Golden Dragon China Portfolio (PGJ)
With AUM of $312.9 million, this fund sees solid average daily volume of nearly 165,000 shares. It tracks the Nasdaq Golden Dragon China Index while it charges 70 bps in fees and expenses. In total, the fund holds 72 stocks in the basket with the top 10 firms accounting for nearly 54% of total assets.
More than half of the portfolio is allocated to information technology, followed by consumer discretionary (21.28%). Other sectors receive minor allocations in the portfolio. The ETF is widely spread across various market cap levels– mid caps (43%), small caps (41%) and large caps (16%). The product gained nearly 3.6% over the past five trading sessions.
First Trust China AlphaDEX Fund (FCA)
This fund follows an AlphaDEX methodology and ranks stocks in the space by various growth and value factors, eliminating the bottom ranked 25% of the stocks for inclusion in the basket. The fund has amassed just $4.4 million in its asset base and trades in paltry volume of under 7,000 shares a day. Expense ratio came in at 0.80%.
This approach results in a basket of 50 stocks with a definite tilt toward the mid caps. Each security holds less than 4% of assets, suggesting lower concentration risk. Financials take the top spot at 21% in terms of sector look, closely followed by utilities (14.86%) and information technology (14.03%). The ETF has added nearly 3.4% over the past five days (read: Buy these China ETFs as Outlook Brightens).
Guggenheim China Small Cap ETF (HAO)
For targeted exposure to Chinese small cap stocks, investors could find HAO an intriguing option. This ETF tracks the AlphaShares China Small Cap Index, holding 283 securities in its basket. The product has AUM of $254.3 million and average daily volume of 122,000 shares. It charges 75 bps in annual fees.
The fund is widely spread out across each sector and security. None of the securities holds more than 1.47% of assets individually.
Industrials, financials, information technology, consumer discretionary and materials account for double-digit exposure in the fund. HAO added 3.3% over the past week.
Bottom Line
Investors should note that the trio is clearly outperforming the broad U.S. market and emerging market funds by wide margins. This trend is expected to continue at least for the short term given compelling fundamentals and recent positive indicators. 
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