Investors hoping they've seen the worst of the world's economic woes are turning to an unlikely asset: China stock ETFs.
Shares of all 10 of the most popular China stock ETFs — including the two largest, KraneShares CSI China Internet and iShares MSCI China ETF — are up an average 5.5% in the past three months. That's especially noteworthy given the SPDR S&P 500 ETF is down 16.1% in that time.
That's not to say China stock ETFs avoided pain altogether. The $8.3 billion KraneShares CSI China Internet ETF is still down 9.8% this year. But that sure beats the more than 20% drop in the S&P 500. The S&P 500 is on pace for its worst return in the first half of the year since 1970, says S&P Global Market Intelligence.
"The Chinese economy has shown signs of rebounding, and sentiment for Chinese growth stocks has improved in recent weeks," said Todd Rosenbluth, head of research at VettaFi.
Looking At The China ETF Rebound
Why are China stock ETFs rallying? Many hope China's economy and tech sector are pulling out of the global malaise first. There's also hope that the Chinese government is toning down its push to regulate internet companies there.
"Since Vice Premier Liu He's March 16 speech, Chinese equities have rallied as investors' concerns regarding China's internet regulation diminish," said Brendan Ahern, chief information officer of KraneShares. "China's zero-Covid policy ... appears to have eased (after) Shanghai's lockdown, as evidenced by recent relaxation of quarantine rules."
Evidence of the easing of internet regulations in China is the biggest lift. The KraneShares CSI China Internet ETF is up nearly 16% this year. That's the top showing of any of the major China stock ETFs. And if you look inside the ETF, you can see why. Its largest holding, at 10.1% of the portfolio, is online giant Alibaba. And shares of Alibaba this year are up nearly 6% in the past three months.
"Chinese equities represent the sum of all fears with a multitude of concerns embedded in their share price," Ahern said. "As these headwinds diminish, the securities are reverting from historically low valuation levels and especially relative to U.S. technology stocks."
Which China Stock ETFs To Pick
China internet stocks are doing the best. But the rest of the field is consistently higher in the past three months, too.
The next largest China stock ETF is the $8.2 billion iShares MSCI China. And it, like many diversified China stock ETFs, is up 5% in the past three months. As with KraneShares CSI China Internet, iShares MSCI China holds big stakes in China's top internet firms. Its No. 1 holding, at 12% of the portfolio, is Tencent Holdings. No. 2, at 9.6%, is Alibaba Group.
But this China stock ETF also adds a broader cross-section of sectors, too. Consumer discretionary is the top sector in the ETF at 31% of the fund. And communications and finance top out the top three, at 18% and 15% respectively. It's also important to note that many emerging-market ETFs also give you roughly 30% exposure to China stocks, Rosenbluth says. But most emerging-market ETFs aren't gaining this year, as they're getting dragged down by positions in other regions in the world. The iShares MSCI Emerging Markets ETF is down more than 10% this year.
The question now is whether or not the bottom is in with China stock ETFs. Ahern said the best way to know that is by following the money. He says many companies in China are taking advantage of still-discounted prices on their shares by buying them.
"The companies wouldn't be spending their cash to buy back their shares if they didn't believe in the opportunity," said KraneShares' Ahern.
How China Stock ETFs Are Doing
| ETF | Symbol | 3-month change | Assets (in billions) | Expense ratio |
|---|---|---|---|---|
| KraneShares CSI China Internet | 15.5% | $8.3 | 0.76% | |
| iShares MSCI China | 5.0 | 8.2 | 0.59 | |
| iShares China Large-Cap | 5.8 | 5.9 | 0.74 | |
| Xtrackers Harvest CSI 300 China A-Shares | 1.0 | 2.8 | 0.65 | |
| SPDR S&P China | 3.7 | 1.6 | 0.59 | |
| Invesco China Technology | 7.7 | 1.1 | 0.7 | |
| WisdomTree China ex-State-Owned Enterprises Fund | 5.9 | 0.9 | 0.32 | |
| KraneShares Bosera MSCI China A 50 Connect Index | 3.3 | 0.6 | 0.56 | |
| Direxion Daily FTSE China Bull 3X Shares | 6.1 | 0.6 | 1.42 | |
| iShares MSCI China A | 1.2 | 0.6 | 0.6 |
