ETF Talk: Chasing China’s ‘Cha-Ching!’ with This ETF

Peter Thiel, an American entrepreneur and venture capitalist, once said, “The most contrarian thing of all is not to oppose the crowd but to think for yourself.”

Now, if you’ve been following my writing for a while, you know that I wrote an article reflecting on my personal ethos. The first pillar was focus — and that is one of the key parts of my work, and everything else I do in my life.

Part of this focus is the “full, volitional and conscious awareness of reality…” while the rest of that sentence ends with, “in the moment,” it can also be applied to my stock and exchange-traded fund (ETF) choosing and recommending.

Now, I say this because I know China can be a bit of a racy topic, especially when it comes to investing. Even though it has the second-largest economy, it has found itself in a deep economic slump. So, stick with me when I say we are not here to oppose the crowd, but to focus, and think for ourselves.

Let’s delve into China’s recent stimulus and how we can capitalize on it. On Sept. 24, the People’s Bank of China (PBOC) announced a multitude of monetary stimulus measures, including rate cuts and reducing the amount of cash that banks need to have on hand, with the goal of boosting its economy.

The announcement led to a stimulus-triggered rally the following Wednesday. Scott Rubner, tactical specialist at Goldman Sachs, noted, “I have never seen this much daily demand for Chinese equities: I do not even think we have gone back to benchmark index weights yet.”

With that in mind, let’s bring the focus back to our goal — jumping on this opportunity, and jumping on it with the SPDR S&P China ETF (GXC). GXC is a non-diversified, market-cap weighted index that is designed to define and measure the investable universe of publicly traded companies based in China, which are available to foreign traders.

As with most international equity ETFs, GXC is dominated by holdings in large-cap stocks. Inevitably, this can lead to a diminished connection to the local economy. However, relative to comparable China-based ETFs, GXC has several advantages.

GXC carries more than five times as many holdings. In doing so, GXC delivers greater diversification from an individual security perspective. Though the ETF is skewed more toward banks and oil companies — not an uncommon trend, especially for emerging markets — it offers a more attractive profile than other leading ETFs of its kind.

Moreover, for the exposure offered within GXC, it is considerably cheaper than its cohorts with only a 0.59% expense ratio.

The fund has a market cap of $461 million, with $458 million in assets under management. Further, GXC offers a dividend yield of 2.86% and paid out $2.31 per share in the last year. GXC currently pays a dividend every six months.

Courtesy of stockcharts.com.

As we discussed, I look at focus as a whole — and that is how I want us to look at the chart. Up until September, the chart of GXC was nothing spectacular. Since then, a spike occurred that is spectacular. This is what I meant when I mentioned making the stimulus work for us.

Mid-September, when the stimulus was first introduced, it stoked the aforementioned rally. So, the spike is no surprise, but what is impressive is the dip. The dip informs us that while traders have regained a bit of wariness, they have not lost faith — and bringing back Mr. Thiel, we are not going against any crowd. But we have to ask ourselves if this could potentially be a good time to buy, and it just might be.

Speaking of Mr. Thiel, we had a great discussion about literature and life at a recent charity event. We are both fans of Ayn Rand!

The fund’s top 10 holdings include Tencent Holdings Ltd. (TCTZF), 12.87%; Alibaba Group Holding Ltd. (BABAF), 6.57%; China Construction Bank Corp. (CICHF), 2.92%; PDD Holdings Inc. ADR (PDD), 2.91%; Meituan (MPNGF), 2.77%; Industrial & Commercial Bank of China Ltd. (IDCBF); 1.72%; Bank of China Ltd. (BACHF), 1.61%; Xiaomi Corp. (XIACF), 1.60%; JD.com Inc. (JDCMF), 1.41% and Ping An Insurance (Group) Co. of China Ltd. (PIAIF), 1.22%.

GXC is an attractive option for traders looking to diversify their portfolios and get a taste of the world’s second-largest economy. With stock prices soaring and stimulus flowing, now may be the time to get in on the action. With a diverse profile, modest expense ratio and tidy dividend yield, the SPDR S&P China ETF may be a possible vehicle for chasing China’s “cha-ching!”

So, in true “Woodsish” fashion, I will use a final quote to tie together thinking for oneself and the importance of focus. In the words of the well-known essayist, poet and philosopher, Henry David Thoreau, “Think for yourself, or others will think for you without thinking of you.”

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.