Inside The Crash In China ETFs

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Includes: ASHS, CHII, CHIM, CHIQ, CHIX, CNXT, CQQQ, ECNS, FCA, FCHI, FXI, GXC, HAO-OLD, MCHI, PGJ
by: Zacks Funds

China was hot and soaring among all stock markets across the globe for the most of this year thanks to rounds of ultra-easing policies. In fact, China was leading the global markets, attaining the best performing country spot for the first half.

But the incredible run was washed away over the past few weeks as concerns brew over the longevity of the stimulus-driven rally and the real health of the economy. Further, worries over lofty valuations raised a panic alarm among investors after a one-year stupendous rally.

What Let the Dragon Out

Several factors led to horrendous trading in China. First, more than 40% of the mainland China companies halted trading in their shares, locking in up $2.6 trillion worth of shares. This is touted to be the largest wave of trading halts in the history of the Chinese equity market.

Additionally, the world's second largest economy is faltering with slower growth in six years, credit crunch, a property market slump, weak domestic demand, lower industrial production, and lower factory output. Corporate profits are also lower than a year ago. Further, a slew of recent measures including fresh interest-rate cuts, stock purchases by state-directed funds, looser margin-financing rules, central bank pledge of liquidity support, and suspension of new listings are not helping in any way to boost investors' confidence.

Lastly, deepening Greece crisis and Grexit fears shook investors across the globe, a creating risk-off trading environment.

The combination of factors led to a dragonish sell-off in the Chinese market. The Shanghai Composite Index plunged over 8% in today's session, extending its steepest three-week decline since 1992. With this, the index tumbled 32% since its peak in June 12 and wiped out more than $3.5 trillion in market capitalization. On the other hand, Hong Kong's Hang Seng Index plunged as much as 8.6% on the day, making the biggest drop since November 2008.

ETF Impact

Quite expectedly, the terrible trading has been felt in the Chinese ETF world too. Funds in this space also saw big losses over the past one month, putting an end to their winning streaks, and landing them in the bear territory.

China ETFs Performance
Market Vectors China SME-ChiNext ETF (NYSEARCA:CNXT) -43.54%
db X-trackers Harvest CSI 500 China-A Shares Small Cap Fund (NYSEARCA:ASHS) -43.49%
iShares MSCI China Small-Cap ETF (NYSEARCA:ECNS) -29.14%
Guggenheim China Small Cap ETF (NYSEARCA:HAO-OLD) -25.24%
First Trust China AlphaDEX Fund (NASDAQ:FCA) -17.27%
SPDR S&P China ETF (NYSEARCA:GXC) -16.38%
iShares FTSE China ETF (NASDAQ:FCHI) -16.14%
iShares MSCI China Index Fund (NYSEARCA:MCHI) -15.57%
iShares China Large-Cap ETF (NYSEARCA:FXI) -15.08%
PowerShares Golden Dragon China Portfolio (NASDAQ:PGJ) -13.92%

From the above table, it should be noted that steep declines were widespread among the Chinese ETFs. Interestingly, A-shares ETFs have been the worst performers of the Chinese rout, followed by small caps. Large-cap focused funds and the broad market funds too saw double-digit declines over the past four weeks.

Further, ETFs targeting specific sectors like Global X China Industrials ETF (NYSEARCA:CHII), Global X China Materials ETF (NYSEARCA:CHIM), Guggenheim China Technology ETF (NYSE:CQQQ), Global X China Financials ETF (NYSEARCA:CHIX) and Global X China Consumer ETF (NYSEARCA:CHIQ) also bore the brunt, declining 27.46%, 25.26%, 21.25%, 16.32% and 13.71% respectively.

What Lies Ahead?

Given the steep decline in all the corners of Chinese space and huge numbers of trading halts, fears are largely building up in the space. Morgan Stanley's head analyst of emerging markets and global macro economy views this as the biggest bubble in the last 20-30 years, while others are anticipating that China's market turmoil might be a bigger issue than the Greece crisis. It is not only destabilizing the economy but could also have ripple effects in the global markets if it continues for long.

However, the stepped-up measures taken by the government lately will soon start to pay off providing a boost to the stocks. In addition, easy cheap money flows in contrast to tightening policy in the U.S. will allow Chinese ETFs to resume their impressive ascent.

Further, continued selling has made the Chinese stocks inexpensive at current levels. This is especially true given the Shanghai Composite Index and Hang Seng Index have a P/E ratio of 18.91 and 9.7, respectively, compared to 21.3 for the S&P 500 index.

So investors should wait until the Chinese market bottoms out and then cash in on the opportunity of the beaten down prices with any of the above-mentioned ETFs having a favorable Zacks Rank of 2 (Buy) or 3 (Hold).

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