In early July, the shares of many China-based companies reached the highest levels in recent weeks. The price hike followed an editorial on July 6 in the state-owned China Securities Journal, which effectively encouraged investors to buy shares, saying that a "healthy bull market" would be good for the Chinese economy.
The index, up about 30% in the current year (YTD), is now at a level not seen since 2015. Likewise, the index has just hit a new high in 52 weeks, rising over 9% YTD.
Because of this price hike, many wondered which Chinese stocks would benefit long-term portfolios. Exchange-traded funds (ETF) that target the Chinese market facilitate investing in a basket of such stocks. Below we will delve deeper into the growth potential in the Chinese market and two ETFs that deserve further due diligence:
China's growth story is likely to remain intact
China – the world's most populous nation with about 1.43 billion – is the second largest economy behind the US.
The long-term bullish expectations for Chinese equities in this new decade are fairly straightforward: a rising middle class, higher consumption and greater penetration of mobile users are just some of the catalysts that are expected to boost business income in China. For example, e-commerce has experienced rapid growth in China in recent years and currently represents approximately 35% of the $ 5.5 trillion national market, while in the US, e-commerce represents only 11% of total retail sales.
Readers may recall that in some parts of 2018 and 2019, the trade war rhetoric between the US and China affected many Chinese equities and equity funds, which were often further affected by currency movements.
When the COVID-19 pandemic started to spread in early 2020, broader markets led to a decline in Chinese economic activity. As a result, by early spring, many stocks hit lows not seen in a few months, but the stellar rise since then reminds us that the country may be back on track for expansion.
In the second quarter of 2020, the Chinese economy reported YoY after a record 6.8% contraction in Q1. While many analysts initially express concerns about growth due to the effects of the pandemic, the Chinese economy has improved significantly in recent weeks.
With all that in mind, here are two exchange-traded funds worth considering for long-term portfolios.
1.Global X MSCI China Consumer Discretionary ETF
Current Price: $ 23.58
52-week range: $ 14.35- $ 25.11
Dividend Yield: 0.67%
Expense Ratio: 0.65% per year, or $ 65 on an investment of $ 10,000.
The Global X MSCI China Consumer Disc ETF (NYSE 🙂 invests in 68 large and medium-sized Chinese consumer companies. The top five sectors are internet and direct marketing retailing of cars, diversified consumer services, hotels, restaurants and leisure and textiles, clothing and luxury goods.
CHIQ follows the MSCI China Consumer Discretionary 10/50 index, which owns the top five Meituan Dianping (OTC :), JD.com (NASDAQ :), Alibaba (NYSE 🙂 , TAL Education Group (NYSE :), and NIO (NYSE 🙂 account for nearly 40% of the assets under management.
The fund distributes dividends to shareholders every six months. YTD, CHIQ is up around 27.5% which means it is in a bull market. Potential investors may consider buying the dips, especially if the price is $ 21 or less
2. Invesco Golden Dragon China ETF
Current price: $ 51.15
52-week range: $ 30- $ 54.67
Dividend yield: 0.25%
Expense Ratio: 0.70% per year, or $ 65 on an investment of $ 10,000.
The Invesco Golden Dragon China ETF (NASDAQ 🙂 invests at least 90% of its total assets in shares of companies that derive a majority of their earnings from China. PGJ is based on the index.
The fund, which consists of listed US companies that are headquartered or located in China, includes 63 holdings active in various sectors in China. The five largest companies are TAL Education Group, Baidu (NASDAQ :), NetEase (NASDAQ :), JD.com and Alibaba which account for nearly 40% of PGJ,
So far, PGJ has increased by 23% in 2020. As the current earnings season progresses in the US, there may be a short-term gain on the stocks that make up the fund. A shift to $ 48 is likely.
Bottom Line
Since China is the most populous country in the world, we can expect its economy to show resilience in the long run. despite incidental flaws. ETFs provide opportunities to invest in the growing Chinese consumer, e-commerce and technology segments.
