Small-Cap China ETFs To Capture Regional Stimulus Measures

Includes: ASHS, ECNS, FXI, HAO
by: Tom Lydon


China's regional governments are enacting stimulus measures.

Local support could strengthen small-cap China ETFs.

Comparison of China small-cap ETFs to large-cap ETF options.

China's regional governments have stepped in with their own stimulus measures, supporting local growth and potentially lifting China-related exchange traded funds, as Beijing withholds aggressive measures.

Northern Hebie province will dish out 1.2 trillion yuan, or $193 billion, for railways, energy and housing projects, while Heilongjiang province will spend 300 billion yuan in infrastructure and mining, Bloomberg reports.

Premier Li Keqiang has been loath to enact broad stimulus measures, but smaller provinces, where growth has fallen short of the national government's 7.5% target, are beginning to enact on their plans to strengthen the faltering economies.

"The motivation is there - currently GDP is still the key performance indicator for local officials," Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd., said in the Bloomberg article.

The iShares China Large-Cap ETF (NYSEARCA:FXI), the largest China-related ETF, has increased 1.6% year-to-date, lagging behind most developed markets this year.

As regional governments take on a more active role, investors may look at China small-cap ETFs to capture the domestic growth and increased spending for infrastructure projects.

For instance, Guggenheim China Small Cap ETF (NYSEARCA:HAO), iShares MSCI China Small Cap Index Fund (NYSEARCA:ECNS) and db X-trackers Harvest CSI 500 China A-Shares Small Cap Fund (NYSEARCA:ASHS) all include heavy positions in industrial and consumer sectors. In contrast, most large-cap China ETFs have a heavy tilt toward state-backed companies and the financial sector, with FXI showing a 53.1% position to financials.

"[HAO] provides better exposure to sectors that will benefit from growth in domestic consumption relative to a broad-market China exchange-traded fund," according to Morningstar analyst Patricia Oey.

HAO includes 19.8% in industrials, 14.9% in consumer discretionary and 7.4% in consumer staples. ECNS allocates 19.0% to consumer discretionary and 16.4% to industrials. Additionally, ASHS's top holdings include industrials 28.8%, materials 18.9%, energy 14.3% and consumer discretionary 13.6%.

The new ASHS is the fifth A-shares ETF to list in the U.S. and the fourth to offer physical access to A-shares, with a focus on small-cap Chinese equities. The ETF allows investors to track Chinese companies listed on Shanghai or Shenzhen exchanges, as opposed to other China-related ETFs that track U.S. and Hong Kong listed Chinese stocks.

Max Chen contributed to this article.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.