China ETFs Rise On Financial Sector Strength

Worries have been growing over the China market this year, thanks to the country’s huge debt load and falling growth rate. Issues in the banking sector—largely in regards to interbank rates—haven’t helped matters, and actually are making some investors quite skittish about buying into the market, especially with such broad emerging market woes.

However, recent news in the space could suggest that the market may have bottomed out, and that brighter days might be on the horizon. After all, China shares have been trending higher in recent sessions, and now some are growing increasingly bullish on the nation thanks to some positive news from one of the country’s most troubled sectors, financials.

Earnings
This new found optimism is largely due to a key earnings report from Industrial Bank Company which revealed its first half year results. In the report, the company revealed that net income jumped by 27%, helping to push shares higher by roughly 4.5% in the Chinese session.

It also didn’t hurt that analysts at Citic Securities also made a bullish call on the broad Chinese banking space. Analysts at the firm, according to a Bloomberg article, said that banking stocks may rise 20% as concerns about economic growth and financial risks ease, while the analysts also recommended the company’s shares.

Market Impact
This solid earnings report and some analyst optimism regarding one of the country’s banks helped to boost shares across the board in China. This was particularly the case in a few ETFs that are targeted on the nation’s financial sector, as these obviously have the most to gain or lose from changes in perception over the financial sector.

Below, we highlight two ETFs that were especially impacted by this news, and may be interesting plays in the future should positive trends continue in the space:

iShares China FTSE 25 Index Fund (FXI)
This is easily the most popular China ETF in the market, as over $5 billion is invested in the fund and average daily volume is over 17 million shares a day. The product tracks the FTSE China 25 Index, a benchmark that holds about 25 Chinese stocks in its basket, using a cap weighted methodology to weight the component securities.

Although energy and telecoms combine to make up roughly one-third of the portfolio, financials take a plurality of assets at nearly 50% of the total. This means that any news out of the financial sector can have a huge impact on the overall return for this famous ETF.

This is especially true considering that banks are three of the top five biggest holdings in the fund. Fortunately though, the news lately out of the space has been quite solid, easing worries about many of the securities in this product.

The ETF added about 2.3% on solid volume in the session after the report, pushing the five day return for FXI to 6.2%.

Global X China Financials ETF (CHIX)
This news also boosted the much more concentrated CHIX on the day as well. This relatively unpopular fund follows the S-BOX China Financials Index holding roughly three dozen financial securities in its basket.

Large caps dominate this fund, while banking stocks take the lion’s share of assets, though real estate receives a large component as well. Industrial and Commercial Bank of China and China Construction Bank combine to make up over one-fifth of the assets, while Bank of China isn’t far behind at 9.9%.

Obviously with such a tight focus, the ETF can be prone to big swings in a short time period, so volatility levels can be high. Investors should also note that trading volumes and AUM are light with this product, so bid ask spreads may be a bit wide.

Still, this ETF has been a star performer lately, adding roughly 3.8% on better-than-average volume, pushing the five day return to 8.3% for this often overlooked ETF.

Bottom Line

Chinese financials have been securities to avoid lately, as worries over debt, growth, and the government’s backing of the sector have caused share prices to fall. This has translated into stiff losses for a number of China ETFs, including the most popular fund in the segment, FXI.

Recent earnings and some positive analyst talk regarding one of the firms in the space has led some to believe that the worst may be over in the segment, especially if the current profit trend from Industrial Bank can be replicated by others in the space. If this is the case, look for the aforementioned ETFs to lead the way, although it seems clear that more volatility is likely to follow no matter what happens in the segment.

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