Which China ETFs Have The Lowest PE? And Does It Matter?

by: Macro Investor

I recently posted a series of articles investigating the performance of 3 China ETFs, titled A Tale of 3 Leveraged ETFs (Part 1, Part 2, and Part 3). For case study purposes, I considered three China ETFs, the iShares FTSE China 25 Index ETF (NYSEARCA:FXI), the ProShares Ultra FTSE China 25 ETF (NYSEARCA:XPP), and the Direxion Daily China Bull 3x Shares ETF (NYSEARCA:YINN).

While the focus was on the leverage part of the ETFs, and not the ETFs themselves or on China, one reader asked how the P/E ratios of the different China ETFs stack up.

Now, I am going to say something that will, I am sure, be considered a heresy by most readers and commentators on Seeking Alpha. I do not look at P/E ratios at all when investing. I subscribe to the Efficient Market Hypothesis that no one can pick stocks or can time the market, and over the long run portfolio returns will track the market. The only way to generate excess return is to use leverage. Hence, I like to pick macro trends and then invest in the corresponding index, using leverage as a way to boost returns. This has served me very well in the past and I will keep doing this for my own portfolio.

That said, if there is a question from a reader, then I feel that it is important for me to respond to it. So, I did a little bit of digging in Morningstar, and tabulated a list of China ETFs by trailing P/E. The ETFs I listed are:

  • Global X China Financials ETF (NYSEARCA:CHIX)
  • Global X China Materials ETF (NYSEARCA:CHIM)
  • iShares MSCI China Small Cap Index (NYSEARCA:ECNS)
  • iShares FTSE China 25 Index Fund
  • First Trust China AlphaDEX (NASDAQ:FCA)
  • Global X China Industrials ETF (NYSEARCA:CHII)
  • iShares FTSE China HK Listed Index (NASDAQ:FCHI)
  • Guggenheim China Small Cap (NYSEARCA:HAO)
  • iShares MSCI China Index (NYSEARCA:MCHI)
  • Guggenheim China All-Cap (NYSEARCA:YAO)
  • EGShares China Infrastructure (NYSEARCA:CHXX)
  • Global X China Energy ETF (NYSEARCA:CHIE)
  • PowerShares Golden Dragon China (NASDAQ:PGJ)
  • Guggenheim China Technology (NYSEARCA:CQQQ)
  • Global X China Consumer ETF (NYSEARCA:CHIQ)
  • Global X NASDAQ China Technology ETF (NASDAQ:QQQC)
ETF Name Symbol Trailing P/E 3-month return 1-year return Beta
Global X China Financials ETF CHIX 7.4 19.9% 30.2% 0.91
Global X China Materials ETF CHIM 7.5 10.4% -5.5% 0.98
iShares MSCI China Small Cap Index ECNS 8.2 16.0% 15.3% 0.81
iShares FTSE China 25 Index Fund FXI 8.7 11.8% 14.3% 0.92
First Trust China AlphaDEX FCA 9.0 14.2% 25.2% 0.96
Global X China Industrials ETF CHII 9.3 14.6% 17.8% 0.76
iShares FTSE China (HK Listed) Index FCHI 9.5 12.0% 17.7% 0.87
Guggenheim China Small Cap HAO 9.7 15.2% 18.5% 0.88
iShares MSCI China Index MCHI 10.3 11.0% 20.7% 0.87
SPDR S&P China GXC 10.3 10.1% 18.1% 0.87
Guggenheim China All-Cap YAO 10.4 10.5% 17.9% 0.9
EGShares China Infrastructure CHXX 10.8 15.3% 26.9% 0.77
Global X China Energy ETF CHIE 12.5 10.2% 14.1% 0.87
PowerShares Golden Dragon China PGJ 13.6 -3.2% -6.0% 0.97
Guggenheim China Technology CQQQ 14.6 1.8% 4.3% 0.94
Global X China Consumer ETF CHIQ 16.3 9.2% 6.7% 0.8
Global X NASDAQ China Technology ETF QQQC 17.1 -2.3% 2.0% 1.06

So, how does 1 year return track to trailing P/E? Below is a graph showing that.

As expected, as trailing P/E drops, 1-year return increases. However, the R2 is not compelling at 25%. This means only about 25% of the 1-year return is explained by trailing P/E. The trouble is with the two ETFs CHIM and PGJ that had negative returns. What happens if we exclude those?

Now suddenly the R2 jumps to 66% and there is a strong indication that lower trailing P/E will lead to higher 1-year returns. The problem is with the selective sampling. If, for example, you were to go with the China Materials ETF, you would have a big loss in 2012 when the market as such rallied. (The key assumption here is that Trailing P/Es were more or less identical a year back and the relationship holds, which may not be true, but I have no way to get the Trailing P/E data one year back unfortunately).

Anyway, there you have it. You have a list of China ETFs sorted by Trailing P/E. Personally, I plan to stick with the FXI, the closest to a market index. But individual investors should select for themselves what they choose to invest in. One parting thought though, if you take a look at the beta for these set of ETFs, none of them appear that risky. Almost all of them have a beta less than 1. So, they should be less volatile than the broader market index, which I would presume is the China market index (though I do not know for sure, as Morningstar calculates it).

Disclaimer: This is not meant as investment advice. I do not have a crystal ball. I only have opinions, free at that. Before investing in any of the above-mentioned securities, investors should do their own research, consult their financial advisors, and make their own choice.

Disclosure: I am long FXI, XPP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.