China ETFs: The Importance of Small Cap and Cyclical Outperformance

by: Gary Gordon

Riding the China equity wave since the third week of February hasn’t been that difficult. There have been dozens of reasons - fundamental, technical, contrarian, historical - to revisit the mainland. (See “3 More Reasons To Rethink Your China Allocation.”)

On the other hand, selecting the best exchange-traded fund for the job may not have been as easy. In my columns, I typically use SPDR S&P China (NYSEARCA:GXC) to illustrate a point. Meanwhile, with clients, I may use regional funds like iShares All-Asia excluding Japan (NASDAQ:AAXJ) or an exporting neighbor like iShares Malaysia (NYSEARCA:EWM) or even mutual funds from the Matthews Fund family.

Still, aggressive investors may want to consider the significance of the performance for Guggenheim Small Cap China (NYSEARCA:HAO), Global X China Consumer (NYSEARCA:CHIQ) and Global X China Energy (NYSEARCA:CHIE). Is the outperformance an endorsement of a middle-class Chinese comeback?

Put another way, there appears to be renewed faith that China is getting closer and closer to ending its inflation-fighting campaign. In anticipation of a more neutral policy stance by mainland leadership, investors are snatching up economically sensitive small companies and cyclicals (e.g., consumers, energy, etc.). Indeed, the outperformance of these areas speak volumes about the confidence many have about China’s prospects going forward.

China ETFs: A Look At One-Month Performance
Approx 1 Mo %
Global X China Energy (CHIE) 7.2%
Global X China Consumer (CHIQ) 4.7%
SPDR S&P China (GXC) 4.5%
Guggenheim China All-Cap (NYSEARCA:YAO) 4.3%
Guggenheim China Small-Cap (HAO) 4.2%
iShares Hong Kong China Listed (NASDAQ:FCHI) 4.0%
iShares China 25 (NYSEARCA:FXI) 3.3%
PowerShares Golden Dragon Halter (NASDAQ:PGJ) 3.2%
iShares Russell 2000 (NYSEARCA:IWM) 3.2%
Market Vectors China (NYSEARCA:PEK) 2.8%
Global X China Materials (NYSEARCA:CHIM) 1.7%
iShares Russell 1000 (NYSEARCA:IWB) 1.6%

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.