Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you see the growing Chinese middle class driving many companies' growth, and you'd like to add some stocks focused on Chinese consumers to your portfolio but don't have the time or expertise to hand-pick a few, the Global X China Consumer ETF (NYSEMKT:CHIQ) could save you a lot of trouble. Instead of trying to figure out which Chinese-consumer stocks will perform best, you can use this ETF to invest in lots of them simultaneously.
ETFs often sport lower expense ratios than their mutual fund cousins. This ETF, focused on Chinese consumers, sports an expense ratio -- an annual fee -- of 0.65%. The fund is fairly small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This Chinese-consumers ETF has lagged its benchmark over the past three years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
Why Chinese consumers?
Many companies are chasing Chinese consumers because there are so many of them, they're a growing population, and they're eager to spend. A recent article in The Economist noted that "China contributed more than any other country to the growth in global consumption in 2011-13" and that the Chinese government itself is aiming to boost consumer spending.
More than a handful of Chinese-consumer stocks had strong performances over the past year. Melco Crown Entertainment Ltd. (NASDAQ:MLCO) soared 95%. It's one of relatively few companies operating casinos in Macau, where gaming revenue grew by 18.6% in 2013. Melco Crown Entertainment's new Studio City casino on the Cotai Strip should benefit from its position on a new rail system. Its other projects include the City of Dreams Manila casino, opening soon in the Philippines. With a forward P/E now above 25, the stock is not exactly a screaming bargain, though.
Ctrip.com International, Ltd. (NASDAQ:TCOM) surged 93% over the past year, benefiting from China's $100-billion-plus travel boom. Still, the stock is down more than 30% from its 52-week high, largely on concerns about tough competition. Ctrip.com reports its fourth quarter on February 12. In its third quarter, revenue jumped 31% over year-ago levels (and net income was up 92%), with both numbers topping estimates. The company also forecast a slowdown in its growth rate, and management noted that, "We expect mobile to become Ctrip's most important booking platform in the near future, and we will continue to extend our leadership in the online and mobile travel markets in China." Meanwhile, bears are worrying about a slowdown in China's growth.
New Oriental Education and Technology Group (NYSE:EDU), China's largest private educational services provider, advanced 70%. It recently posted unaudited second-quarter results that featured revenue up 25.6% over year-ago levels, operating income up 102.5%, and enrollment up 11.8%. New Oriental Education and Technology helps Chinese students learn English and prepare for exams. Analysts at Jefferies recently maintained their buy rating on the stock while upping their price target from $36 to $40 because of expectations of continued revenue growth and profit-margin expansion. Analysts at Morgan Stanley did the same, setting a new price target of $38.
Other Chinese-consumer stocks didn't do quite that well over the last year, but they could see their fortunes change in years to come. Youku Tudou (NYSE: YOKU), with its streaming video service often compared to YouTube, gained 25%. It is growing briskly, with advertisers spending more, but its shares dropped some in August when management tempered expectations a bit. In Youku Tudou's third quarter, revenue surged 14%, while its bottom line approached profitability. Some worry about its competition with search giant Baidu.
The big picture
If you're interested in adding some stocks focused on Chinese consumers to your portfolio, consider doing so via an ETF. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from this segment that much easier.