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How to Celebrate Chinese New Year with ETFs

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Investors are undoubtedly happy to ring in a New Year in China, as the past one was definitely a forgettable stretch for stocks. Despite surging to start the Lunar New Year, Chinese ETFs crumbled over the next twelve months and underperformed the S&P 500.

These lackluster performances were largely thanks to slowing growth prospects and dwindling capital reserves (see Profit from the China Sell-Off with These Inverse ETFs ). But with both of these issues still front-and-center, investors have to be wondering if further devaluations might be ahead and if more uncertain trading will make the Year of the Monkey the same as this chart below of the Year of the Goat/Sheep:

Recent performance of China ETFs like ASHR and FXI against the S&P 500

Will the Year of the Monkey Be Better?

Despite the concerns facing the China market, there is some reason to be hopeful. The country is somewhat successfully rebalancing its economy to more of a consumer focus, which should help in the long-term. Plus, though growth is slowing, the economy is still moving ahead at a modest clip, suggesting that talk over a hard landing in China is overblown.

But more than anything, it might be time to look at China after a brutal sell-off which has really taken hold over the past few months. If you are a longer term believer in China then the recent price action could represent a solid entry point for most.

How to Play

Fortunately with the rise of China ETFs over the past few years there are plenty of solid options out there to play the Chinese market. Take a look at some of the choices below which could be better positioned than most to benefit in the Year of the Monkey:

China Currency Hedged ETFs

We have seen a number of currency hedged ETFs hit the market over the past few years as the dollar has strengthened against a host of foreign currencies. While this trend was at first focused on Japan and Europe, it has finally spilled over into China with (CNHX - Free Report) from CSOP and (ASHX - Free Report) from Deutsche Bank (see New China Currency-Hedged ETFs Head-to-Head).

Both of these funds look to give investors broad market exposure but in a way that eliminates the risk from a falling yuan. While a sliding yuan hasn’t been a big problem so far, many traders are betting on the currency falling again in the near future. If this happens, both CNHX and ASHX will be top plays for China ETF investors. We have seen this trend take place in Japan, and more recently, in Europe. The falling currency tends to act as a stimulus, and this hedging approach allows foreign investors (like us here in the USA) to take advantage of the trends without losing it back on the currency side.

The main downside here is that both funds are still pretty unpopular and so trading volumes are low right now. This may result in some bigger bid/ask spreads, but I think if we see another devaluation or two from China that these will catch on.

China Consumer

China is quickly looking to the consumer side of its economy in order to save the nation from a low growth malaise. There has already been some success on this front, but there is definitely a long way to go. That is why I think the consumer sector has great potential for China in the longer term, making an ETF like (CHIQ - Free Report) an intriguing pick.

The fund focuses on the consumer cyclical market, though it also has a roughly 30% allocation to consumer staples as well. Top segments include packaged food, automotive, and internet/catalog retail, though no single segment makes up more than 20% of assets (see all the consumer staples ETFs here).

The fund doesn’t hold a ton of securities at right around forty in total, but it does a great job of spreading out assets among the component securities. While it had an awful time last year, this could definitely be an interesting longer term play for investors who want some China exposure and are anxious to get in on an area of their market that looks to be a focus for the Chinese economy for years to come.

Buy Ranked ETFs

There are actually a few funds out there in the China space that have a Zacks ETF Rank #2 (Buy) right now. This puts them near the top in terms of their potential over the next year, making any of the following great picks for investors looking to buy some securities targeted at the Chinese market.

First up is Market Vectors’ (CNXT - Free Report) which tracks the SME-ChiNext 100 Index. This benchmark has a heavy focus on tech stocks, though industrials and consumer cyclical round out the top three (see all the Zacks ETF Ranked funds in the Asia-Pacific Category).

The other two funds that have ‘buy’ ranks right now target the A-Shares market, (KBA - Free Report) from KraneShares and also (ASHR - Free Report) from Deutsche Bank. The A-Shares market was the star for much of last year but it definitely hit some turbulence as of late. However, this category of the China market has arguably the most potential as it focuses on securities that are more dependent on China, while many components are absent from broader regional indexes at this time.

If A-Shares get included in some of these major benchmarks it will definitely be a big boost to investors here as it will result in some buying pressure from index managers. Beyond that though, both ASHR and KBA offer investors a pretty diversified look at the market as both hold more than 200 stocks in their baskets while financials and industrials account for the two biggest sectors for each.

Either way though, the Year of the Monkey looks to be an interesting one for China ETF investors. I think things will remain volatile, but the ETFs listed above are probably the best ways to play the situation and potentially profit as well. 

Happy New Year and best of luck investing!
 

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