ETF Talk: Follow the Yellow BRIC Road

Now that U.S. elections are over, it’s time to turn our inward gaze out — and back to China, the second-largest economy in the world.

China is one of the four major emerging markets that make up the acronym BRIC (Brazil, Russia, India, China). In addition, China is an important market for investors to consider.

If you’ve been following the news on China at all, you will know that China’s central bank implemented a “policy bazooka” of stimulus measures that resulted in an immense stock rally in September. It was China’s biggest stimulus since the pandemic and aimed to steer its economy back towards robust growth.

While investor optimism has cooled in the weeks following the rally, there are signs that the government is more serious in its policy follow-through going forward, with China looking to approve a multi-million-yuan stimulus in the coming weeks. So, with this in mind, we continue to follow the yellow BRIC road to China to take a look at its small-cap market with the iShares MSCI China Small-Cap ETF (ECNS).

This fund seeks to track, but not beat, the investment results of the MSCI China Small Cap Index, which is composed of small-cap Chinese equities available to international investors. The fund utilizes an indexing approach, which helps mitigate risk and portfolio turnover. Since the fund does not try to beat the underlying index or take temporary defensive positions when markets decline or appear overvalued, be aware that the likelihood of the fund outperforming the MSCI China Small Cap Index is quite diminished.

However, unlike China ETFs that hold large-cap stocks or are skewed toward banks and oil companies, ECNS remains closely tied with the local economy as a small-cap fund. This means that the stocks in ECNS are dependent on demand from local consumers, and this makes them a better pure play on emerging markets and provides better diversification and a more attractive value profile.

The fund’s sector exposure favors Health Care at 21.29%, followed by Real Estate, 13.22%, Industrials, 12.60%, Consumer Discretionary, 11.21% and Information Technology, 11.20%.

Top holdings of ECNS include GDS Holdings Ltd Class A (9698.HK), 2.2%, Zai Lab Limited (9688.HK), 2.20%, Sunac China Holdings Ltd (1918.HK), 1.75%, HUTCHMED (China) Limited (HCM.L), 1.71%, China Everbright Environment Group Limited (0257.HK), 1.42%, Chinasoft International Ltd (0354.HK), 1.37%, Country Garden Services Holdings (6098.HK), 1.33%,  Kingboard Holdings Ltd (0148.HK), 1.28%, 3SBIO Inc (1530.HK), 1.17% and Minth Group Ltd (0425.HK), 1.13%.

ECNS has net assets of around $65 million with a 5.01% yield and a lower-than-average expense ratio of 0.59%. It is up 14.53% over the last three months, down 5.88% over the last month and 4.79% for the year to date.

Chart Courtesy of www.StockCharts.com.

As the chart above shows, the fund gained a boost in April and May, and again in September, as China’s government enacted rescue measures to restore investor confidence. While it’s true that China has failed to follow through with proposed policy support in the recent past, there are signs that this time around, the stimulus will be better supported long term.

China arguably has been waiting for the U.S. election with breath as bated as those of us here at home and has plans to continue to stimulate the economy and drive growth to the tune of about $1.4 trillion. Although some investors are still reluctant to start the long-term trek down the road of emerging markets, if the Chinese government does indeed follow through with its proposed fiscal policy, now could be a good time to add exposure to the world’s second-largest economy.

Be aware, however, that instability and volatility are factors that require consideration. Investors should always do their due diligence before adding any stock, fund or ETF to their portfolio.

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.