Slowdown in China: Watch These ETFs

As you've probably heard, signs of a slowdown are coming from the most important emerging-market nation, China. Weak February trade numbers showing a $23 billion trade deficit -- the biggest in two years -- are raising some concerns among investors.

As a consequence, big financial institutions lowered their China GDP growth forecast for the first quarter and full-year 2014. Bank of America Merrill Lynch, for example, reduced its first-quarter GDP growth forecast to 7.3% from 8% and its annual growth forecast to 7.2% from 7.6%.

You may not think that's a significant cut, but this could be the first sign of a slowdown coming to the country.

Key indexes
Trying to understand what's happening and where to invest in China is not easy. But in order to get a better view of what's going on in the country, start by looking at the country's stock indexes. A good one to follow is the Harvest CSI 300 index, which is composed of the largest and most liquid stocks listed on the Shenzhen and Shanghai Stock Exchange, also known as the "A" share market.

The index dropped to five-year lows after the trade numbers were released. Now, according to data compiled by Bloomberg, the CSI 300 is trading at 7.7 times projected 12-month earnings, the lowest level since 2007. So the index made a correction, but could it be a temporary overreaction? After all, the trade numbers reflect some distortion as a result of the inclusion of Chinese New Year trade figures, making year-over-year comparisons unfavorable.

If you buy this thesis, you might want to go for two ETFs that track this index: Db X-trackers Harvest CSI 300 China A-Shares (NYSEMKT: ASHR  ) and Market Vectors China (NYSEMKT: PEK  ) . Keep in mind that both of these funds have dropped significantly this year, losing 9.6% and 12.2%, respectively.

One interesting thing about the CSI 300 index is that it does not track Chinese megacap names like China Mobile (NYSE: CHL  ) , CNOOC (NYSE: CEO  ) , and Baidu (NASDAQ: BIDU  ) , as they are not listed in mainland China. Thus when you invest in these two funds, you will have significantly lower weightings in the telecom, energy, and technology sectors, and consequently a relatively high weighting in financials, industrials, materials, and consumer goods.

However, funds' allocations bring certain risks. Db X-trackers Harvest CSI 300 China A-Shares and Market Vectors China allocate 36% and 39%, respectively, to the financial sector, which is normally the first one to correct in market slowdowns.

Another index
There's another index that covers the Chinese "A" share market, MSCI China A IMI, and a recently launched ETF that follows it, KraneShares Bosera MSCI China A (NYSEMKT: KBA  ) .

This fund allocates 32% to the financial sector -- a bit less than the other two but still worrisome, given the uncertainty. Industrials is the second-largest sector at 16%, followed by consumer discretionary at 12% and materials at 9%. The fund is very light on technology stocks at just 5%, in line with the other broad-based funds.

In addition, the KraneShares Bosera ETF has 50% more holdings than the other two ETFs, giving it broader coverage and more diversification, which could make it more stable.

Some Foolish thoughts
Despite the differences in year-to-date performance, there's a high correlation between the three funds.

Market Vectors China and db X-trackers Harvest CSI 300 are more tilted toward the financial sector, making them a bit less attractive in the current scenario. Chinese financials remain in decent shape, but investors see short-term risk.

From a longer-term point of view, if you expect more consumer-driven Chinese growth, KraneShares Bosera could be a better option, as it should get a boost from its slightly larger position in industrials.

Another Way to Profit From China's Rising Consumer
U.S. automakers boomed after WWII, but the coming boom in the Chinese auto market will put that surge to shame! As Chinese consumers grow richer, savvy investors can take advantage of this once-in-a-lifetime opportunity with the help from this brand-new Motley Fool report that identifies two automakers to buy for a surging Chinese market. It's completely free -- just click here to gain access.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2885382, ~/Articles/ArticleHandler.aspx, 8/28/2015 9:06:54 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Louie Grint

I am a curious economist who likes to investigate what is behind asset price movements across the globe. My articles range from industry analysis of various sectors to understanding global macro events that could trigger volatility in the markets.

Today's Market

updated 11 hours ago Sponsored by:
DOW 16,654.77 369.26 0.00%
S&P 500 1,987.66 47.15 0.00%
NASD 4,812.71 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/27/2015 3:59 PM
ASHR $32.94 Down +0.00 +0.00%
db X-Trackers Harv… CAPS Rating: No stars
BIDU $152.06 Down +0.00 +0.00%
Baidu CAPS Rating: ****
CEO $123.06 Up +16.93 +0.00%
CNOOC, Ltd. CAPS Rating: **
CHL $61.34 Up +2.32 +0.00%
China Mobile CAPS Rating: ****
KBA $43.16 Up +3.51 +0.00%
KraneShares Bosera… CAPS Rating: No stars
PEK $41.60 Up +3.74 +0.00%
Market Vectors Chi… CAPS Rating: No stars