ECNS and HAO: Comparing the 2 Small-Cap China ETFs

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Includes: ECNS, HAO
by: China Play Stocks

In the China small-cap ETF space, there are two main options: the Guggenheim China Small Cap ETF (NYSEARCA:HAO) and the iShares MSCI China Small Cap Index Fund ETF (NYSEARCA:ECNS). Let us start with a quick comparison of the basics:

ETF

Expense Ratio

AUM (USD)

Number of Holdings

Coverage universe

HAO

0.7%

$376.9MM

201

H-shares, N-shares, ADRs

ECNS

0.65%

$23.9MM

313

H-shares, B-shares and Red-chips

The main difference between the two ETFs is the universe of stocks they each cover. B-shares are listed on the mainland exchanges (Shanghai and Shenzhen) and available to foreign investors. H-shares companies, incorporated in the mainland, are listed on the Hong Kong stock exchange. Red-chips are government-owned mainland companies, incorporated outside of the mainland, that are listed in Hong Kong. N-shares are Chinese companies listed in New York. ADRs are American Depository Receipts of Chinese (and other foreign) companies that trade in the U.S. exchanges, including the Pink Sheets. P-Chips are private Chinese companies, incorporated outside of the mainland, that trade on the Hong Kong stock exchange.

What is unique about ECNS is that it is the only U.S. listed ETF that provides access to Chinese B-shares. So, while both HAO and ECNS target small-cap Chinese stocks, the underlying index they each track is different. HAO tracks the AlphaShares China Small Cap Index which defines small-cap companies as those H-shares, N-shares, ADRs or GDRs that have a maximum float-adjusted market capitalization of $1.5 billion. ECNS tracks the MSCI China Small Cap Index, a float-adjusted market-cap weighted index comprising the bottom 14% of the universe of Chinese equities that are either H-shares, B-shares, P-Chips or Red-Chips. ECNS does not have any N-shares or ADRs.

The top 10 holdings of ECNS are:

DIGITAL CHINA HOLDINGS LTD

1.20%

KINGDEE INTERNATIONAL SFTWR

1.04%

CHINA EVERBRIGHT INTLLTD

1.03%

PORTS DESIGN LIMITED

1.02%

WEST CHINA CEMENT LTD

0.96%

MINTH GROUP LTD

0.94%

HARBIN POWER EQUIPMENT CO-H

0.92%

SINO BIOPHARMACEUTICAL

0.92%

SHENZHEN INTL HOLDINGS

0.88%

REXLOT HOLDINGS LTD

0.88%


The top ten holdings of HAO are:

ZHAOJIN MINING INDUSTRY CO LTD

1.51 %

BBMG CORP

1.42 %

CHINA SHANSHUI CEMENT GROUP LTD

1.40 %

GREAT WALL MOTOR CO LTD

1.36 %

CHINA EVERBRIGHT LTD

1.34 %

ZHUZHOU CSR TIMES ELECTR

1.34 %

MINDRAY MEDICAL INTERNATIONAL

1.32 %

SOHO CHINALTD

1.21 %

SEMICONDUCTOR MANUFACTURING INTERNATIONAL CORP

1.20 %

POLY HONG KONG INVESTMENTS LTD

1.18 %

The above tables show that there is no overlap among the top holdings of these two ETFs. Both are also well-diversified with neither having a holding that exceeds a 2% weighting. ECNS is better diversified with a large number of holdings. The securities comprising ECNS are more expensive, with the average P/E = 19.41 and average P/B = 2.5, while HAO’s average P/E = 12.8 and P/B = 1.6.

HAO trades more or less at its NAV, while ECNS deviates from its NAV by as much as 1% on either side; currently, ECNS is trading at a premium of about 1%. ECNS is the new kid on the block and has only accumulated about $23MM in AUM since its inception in September 2010. ECNS is also somewhat illiquid with an anemic daily trading volume of less than 10,000. HAO has been around for a couple of years, has an impressive $376MM, and is liquid with an average daily trading volume of more than 150,000 shares.

The two charts below compare the recent performances of HAO and ECNS with respect to each other, and with respect to two large-cap China ETFs: SPDR S&P China ETF (NYSEARCA:GXC) and iShares FTSE China 25 Index ETF (NYSEARCA:FXI).

Bottom Line: ECNS and HAO are complementary to each other and belong together in a China play portfolio. Once you add GXC, which covers the large-cap space, your portfolio will have diversified exposure to Chinese equities across the spectrum from small-caps to large-caps.

Disclosure: I am long ECNS, HAO, GXC, FXI.

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