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ECNS: Small-Cap Chinese Equities Look Attractive

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Hedge Insider


  • ECNS is a Chinese small-cap fund offered by iShares, an alternative to its MCHI fund that prefers larger-cap Chinese companies.
  • MCHI still looks fairly pricey. Yet in spite of the fact that ECNS followed MCHI lower in its recent correction, ECNS looks relatively cheap.
  • Using the same market risk premium as MCHI, ECNS might offer as much as 30% upside.
  • ECNS is also no more volatile than MCHI, and is more diversified across both sectors and its individual holdings.
  • For the U.S. investor that is bullish on China, I think ECNS is an attractive long-term hold. MCHI is less exciting.

In a recent article I was lucky to time a correction in Chinese equities; in that article, I thought (and still think) that mainstream Chinese equities looked rather expensive. That is, at least in the short term. However, small-cap equities look more attractive. In my previous (referenced) article, I looked at the iShares MSCI China ETF (NASDAQ:MCHI) which is a popular iShares fund that offers U.S. investors the chance to gain direct exposure to major Chinese equities. It can be used to express a single-country view.

Another iShares fund can be used to express a 'long' view on China, and that fund is the iShares MSCI China Small-Cap ETF (NYSEARCA:NYSEARCA:ECNS). As the name of the fund suggests, this fund invests in an array of smaller companies (smaller on average than those in the MCHI fund, by market capitalization). The expense ratio is 0.59%, the same as the MCHI fund.

The ECNS portfolio consists of 264 holdings as of April 1, 2021, and the largest sector exposures are: Consumer Discretionary (21.02% of the fund), Real Estate (17.74%), Information Technology (11.96%), Health Care (10.95%), and Industrials (10.94%). The fund is fairly well diversified; the largest single-name holding is GCL-Poly (OTCPK:GCPEF) (OTC:GCPEY), a green energy supplier. This company still only represents 4.42% of the portfolio.

ECNS Sector Exposures in April 2021(Source: iShares.com)

Comparing data from iShares for both ECNS and MCHI, we can see that ECNS trades at a much lower valuation. The price-to-book ratio for ECNS is just 1.07 as compared to 2.43 for MCHI. The P/E ratio is 10.79 for ECNS, as compared to 18.11 for MCHI. ECNS's price is not higher-beta either (it is generally not a more volatile instrument). ECNS has attracted only $105.7 million in assets, while MCHI has attracted over $6.6 billion. MCHI is clearly the more popular fund, but ECNS should be far more popular in my opinion.

This article was written by

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Providing commentary and analysis, principally focused on global macro, foreign exchange, and equities as an asset class. Primary interests include equity investing from an international perspective, and FX fair values.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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