PGJ Invesco Golden Dragon China ETF Trust

After years of slowdown, China is on the verge of a recovery thanks to domestic demand growth and increasing exports.  
 
Upbeat Data Fuels Speedy Recovery
 
The economy picked up in the third quarter, rising 7.8% from a two-decade low of 7.5% reported in the second quarter and 7.7% in the first. Foreign exchange reserves climbed 4.7% to a record $3.66 trillion in the third quarter. This marks the biggest increase in five years.
 
Driven by modest government stimulus efforts, the remarkable improvement has increased chances of the economy meeting or exceeding the country’s annual growth target of 7.5% (read: Focus on These China ETFs for Outperformance).
 
Chinese manufacturing index (PMI) rose to 51.4 in October from 51.1 in September, indicating the fastest growth in 18 months. Further, industrial growth in China accelerated 10.3% last month, exceeding the analyst estimate of 10%, while retail sales held steady at 13.3%. Moreover, exports rebounded stronger than expected in October rising 5.6% while imports remained stable at 7.6%. As such, trade surplus more than doubled to $31.1 billion.
 
Though these data suggest strong signs of recovery in the world's second-largest economy, tightening policy concerns and global uncertainties might stall economic growth.
 
Reasons to Worry
 
The People’s Bank of China may tighten its monetary policy in the next few months in order to prevent rising property prices and growing inflation (read: China ETFs Slide on Cash Crunch Fear).
 
Latest housing data in China suggests that home prices in some major cities have climbed sharply and is a bit out of control, leading to heightened worries over a property bubble. This could aggravate inflation, which is already at an eight-month high of 3.2% recorded for October. Apart from these, growing local government debt and slowing fiscal revenue growth are biggest risks to economic growth.
 
Coming to global headwinds, developed markets like U.S. and Europe as well as emerging markets could put pressure on China’s growth. The fears of Fed’s tapering resurfaced in the U.S. as the economy’s growth gathered speed at 2.8% in the third quarter. The surprise jump in U.S. jobs growth added to further worries, thereby boosting dollar against the basket of major currencies.
 
Given this, growth in emerging markets once again slowed down, as the Fed tapering would result in a huge outflow of capital and weigh on current account deficits. Moreover, the European Central Bank (ECB) last week surprisingly cut its interest rates, citing threats of deflation (read: Euro ETFs in Focus After Surprise ECB Rate Cut).
 
Considering the pros and cons, investors still seeking to ride out the slow recovery in the nation could focus on the following three ETFs. Investors should note that the trio has the top Zacks ETF Rank of ‘1 or 2’ and are thus expected to outperform in the months to come (see: all the Emerging Asia Pacific ETFs here).
 
iShares MSCI China Index Fund (MCHI)
 
This ETF follows the MSCI China Index, holding 138 securities in its basket. The fund has amassed over $1 billion in its asset base while charging 61 bps in annual fees. Volume is also good as it exchanges roughly 563,000 shares in hand on average daily basis.
 
The product has moderate concentration across its top 10 firms at 51.5% while sector exposure is tilted toward financials at 39.12%. The fund focuses on large cap securities, as it accounts for 81% of total assets while mid caps take the remaining portion with just 2% going toward small caps.
 
The ETF added 0.63% in the past 10 trading sessions but is down 2.68% in the year-to-date time frame. The fund has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating.
 
PowerShares Golden Dragon China Portfolio (PGJ)
 
Though quite unpopular with AUM of under $300 million, this fund sees solid average daily volume of more than 131,000 shares. It tracks the Nasdaq Golden Dragon China Index while charges 70 bps in fees and expenses (read: 3 Biggest ETF Winners from the 3rd Quarter).
 
In total, the fund holds 67 stocks that are widely spread across various market spectrums – mid caps (45%), small caps (36%) and large caps (19%). The product allocates over 55% of its portfolio to technology, with consumer discretionary and health care taking up 19% and 8% of PGJ, respectively. In terms of individual holdings, the ETF is somewhat concentrated on the top 10 firms, accounting for nearly 55% of total assets.
 
The fund lost about 5% in the past 10 days while it is up over 45% in the year-to-date time frame. The ETF has a Zacks ETF Rank of 2 or ‘Buy’ rating.
 
Guggenheim China All-Cap ETF (YAO)
 
This fund has managed assets worth $47.2 million while charges 70 bps in fees per year from investors. Volume is light at less than 14,000 shares a day on average. Holding 205 stocks, the ETF tracks the AlphaShares China All-Cap Index and primarily focuses on large caps as these account for 74% of assets.
 
In terms of holdings, the product puts 42.5% of assets in the top 10 firms, suggesting modest concentration. One-third of the portfolio is tilted toward financials while information technology and energy round off to the next two spots at 17.07% and 12.72%, respectively. Apart from China, the fund also allocates some portion to the securities of Hong Kong.
 
The ETF was down 0.11% over the last 10 trading sessions while it is up about 2% so far this year. The ETF also has a Zacks ETF Rank of 2 or ‘Buy’ rating.
 
Bottom Line
 
Despite the recent softness, the trio could be an attractive choice for investors seeking to tap the opportunity of beaten down prices amid the nation’s promising trends. These funds could definitely move higher in the coming months as depicted by their ranks even though global uncertainty and fears of tight fiscal policy in China could weigh on their performances.
 
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ISHARS-MS CH IF (MCHI): ETF Research Reports
 
PWRSH-GL DR HA (PGJ): ETF Research Reports
 
GUGG-CHINA AC (YAO): ETF Research Reports
 
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