CHL China Mobile Limited

While many investors are still down about corners of the global economy, sentiment is downright pessimistic when you talk to most about China. The country appears to be facing a plethora of issues on a number of fronts, causing many to bet on a slowdown in the country this year. These concerns are not without merits either, as China appears to be approaching a property bubble, inflation is rather high, and European woes could drag down exports and create more unemployment, putting more pressure on the country’s government that could increase unrest.

Yet despite these concerns, the Chinese economy just doesn’t seem to quit, and has actually been a star performer so far this year. Inflation has been edging down, Europe appears to (temporarily) have their problems under control, while the property issue and the slowing economy look to come in for a soft landing. Thanks to these factors, as well as more hopes over a stronger economy, the vast majority of ETFs tracking the country are not only up, but have posted double digit gains so far this year, outpacing a variety of other markets, both developed and emerging, from around the world (read Five ETFs To Buy In 2012).

Although it should be noted that the Chinese bubble could still burst at some point later this year, investors should be encouraged that even in spite of such widespread pessimism, stocks in the country have been able to hold up pretty well. This factor could give further credence to the idea that China will be able to navigate its economy lower without too much damage, potentially making an investment in the country a lower risk play than what many might think, especially considering current sentiment regarding the nation.  

For investors looking to see which corners of the Chinese economy have really started off the year on the right foot, we highlight three of the biggest winners below. All three of these funds have outperformed broad products targeting the country such as YAO or FXI, suggesting that bigger gains have been had in the more niche products (read Forget FXI: Try These China ETFs Instead). This trend might not continue but investors should nonetheless be aware of some of China’s biggest winners in light of the national headwinds but improving global economic fundamentals:

Guggenheim China Technology ETF (CQQQ) +13.0% YTD

One of the three top performers in China so far this year has been CQQQ a fund that follows China’s budding technology industry. It should be noted that this sector is still pretty small and it is tilted towards large and mid caps, giving it more volatility than mega cap funds. The product tracks a benchmark of about 40 companies while charging investors 70 basis points a year in fees for its services (see The Guide To China Bond ETFs).

CQQQ has a relatively concentrated top holdings list as three securities make up at least 9.2% of the assets, although all of the top ten make up at least 4%. The fund also does have some minor levels of exposure to Hong Kong companies as well as putting about 6.5% in companies classified as consumer discretionary and materials firms. With this focus, the fund has a reasonable P/E ratio at 12.4 while the P/B is at 1.6, decent levels considering that the fund has a long terms earnings growth rate of 20% a year.

Global X China Financials ETF (CHIX) +13.3% YTD

2012 has started off as a great year for financials as a number of trouble spots are quickly fading to the backburner. This trend has apparently continued in the Chinese market as well, as CHIX was one of the two best performing ETFs in the space to start the year. The fund tracks about 36 companies based in China while charging investors 65 basis points a year in fees for its services (read Top Three BRIC ETFs).

CHIX is heavily concentrated in banks (51%), but real estate (21.9%) and insurance (20%) also take up sizable chunks as well.  In terms of individual holdings, the Global X product allocates about 10% to each of the following; Bank of China, Industrial & Commercial Bank of China, China Construction Bank, and China Life Insurance (CHL), meaning that the fund is relatively concentrated in its top holdings. However, investors should note that the product does have pretty favorable valuation metrics as the P/E for the fund is below 7.5 while the P/B is below 1.5. This could suggest that CHIX could have further to run should the Chinese economy remain stable this year and if growth rates remain relatively high.

Guggenheim China Real Estate ETF (TAO) +14.1% YTD

Shockingly given the broad fears over the Chinese real estate market, TAO is actually the best performing China fund to start the year. The product tracks the AlphaShares China Real Estate Index which looks to measure equities in the real estate sector that are engaged in some aspect of the business in China or any of the country’s Special Administrative Regions such as Hong Kong or Macau. The product holds just under 50 securities in total and charges investors 65 basis points a year for fees (see Top Three High Yield Real Estate ETFs).

TAO is pretty well spread out among its individual holdings as no one security makes up more than 5.6% of the total and all of the top ten have at least 4.2% of the assets. This suggests that company specific risk should be pretty low in the fund and that no one company will dominate the returns of TAO. With that being said, investors should also note that the Guggenheim fund puts just 25% of its assets in Chinese securities with that vast majority going to those based in Hong Kong instead. Still the product has an incredibly low P/E of 3.8 and a P/B of just 0.6, meaning that deep value could be present in the sector, even when considering the recent surge.

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