Two China ETFs taking different paths could reflect changing market dynamics and investor sentiment toward the Chinese economy. ETFs, or Exchange-Traded Funds, allow investors to invest in a range of stocks without having to own them directly. When two China-focused ETFs perform differently, several key factors may be at play:
- Differences in sectors or types of companies represented**: If one ETF focuses more on technology companies while the other focuses more on manufacturing or financials, their performance could vary significantly. Currently, China’s technology sector is under intense government scrutiny, which can create some uncertainty, while other sectors may be more stable.
- Government policy impact**: The Chinese government often issues policies that have a major impact on certain industries. For example, recent tighter regulation of private technology and education companies may hurt ETFs focused on those sectors, while ETFs that are diversified or focused on more government-supported industries may outperform.
- Macroeconomic performance**: Currently, China’s economy is facing challenges from slowing growth, trade tensions, and the ongoing zero-COVID policy. ETFs exposed to sectors that are more sensitive to these factors may be hit harder than those focused on defensive sectors or companies with stronger global ties.
- Global investor sentiment**: Sometimes, negative or positive sentiment toward the Chinese economy can affect one ETF more than another, depending on the ETF’s geographic or sectoral exposure. In the current global climate, investors may prefer ETFs that offer international diversification over those that focus purely on domestic Chinese companies.
Overall, the divergence in ETF performance suggests that while China is a large economy, not all parts of its economy are experiencing the same changes. Investors should be more selective in selecting ETFs based on the sectors they support, government policies, and global sentiment toward the Chinese economy.
Two exchange-traded funds (ETFs) are looking for profits in China with two different strategies.
While the Rayliant Quantamental China Equity ETF dives into specific regions, the newly launched Roundhill China Dragons ETF buys the country’s biggest stocks.
“[It’s] focused just on nine companies, and these companies are the companies that we identified as having similar characteristics to magnitude in the U.S.,” Roundhill Investments CEO Dave Mazza told CNBC’s “ETF Edge” this week.
Since its inception on Oct. 3, the Roundhill China Dragon ETF is down almost 5% as of Friday’s close.
Meanwhile, Jason Hsu of Rayliant Global Advisors is behind the hyper-local Rayliant Quantamental China Equity ETF. It has been around since 2020.
“These are local shares, local names that you would have to be a local Chinese person to buy easily,” the firm’s chairman and chief investment officer told CNBC. “It paints a very different picture because China is sort of a different part of its growth curve.”
Hsu wants to give access to names that are less familiar to U.S. investors, but can deliver big gains on par with recent Big Tech stocks.
“Technology is important, but a lot of the higher growth stocks are actually people who sell water [and] people who run restaurant chains. So, often they actually have a higher growth than even many of the tech names,” he said. “There’s very little research, at least outside of China, and they may represent what is more of a thematic in the moment trade inside China.”
As of Friday’s close, the Rayliant Quantamental China Equity ETF is up more than 24% so far this year.
ETF (Exchange-Traded Fund) is a type of investment product that is similar to a mutual fund, but is traded on a stock exchange like a stock.
ETFs allow investors to buy or sell ownership in a portfolio of assets (e.g., stocks, bonds, commodities) that have been pre-selected and packaged into one product.
Some of the key characteristics of ETFs are:
- Diversification**: An ETF is generally made up of different types of assets, such as stocks from different companies or bonds from different countries. This helps reduce risk by spreading the investment across a variety of instruments.
- Tradable on an Exchange**: Like stocks, ETFs can be bought or sold at any time during exchange trading hours. This gives investors the flexibility to enter or exit an investment at any time.
- Lower Costs**: Compared to mutual funds, ETFs typically have lower management fees because they are passively managed. Many ETFs track an index, such as the S&P 500 Index, meaning the ETF manager simply ensures that the portfolio reflects the composition of that index.
- Liquidity**: Since ETFs are traded on an exchange, there is usually a high volume of trading, making it easier for investors to buy or sell their units.
- Transparency**: Investors can clearly see what assets are held by the ETF since the composition of its portfolio is usually published regularly.
ETFs offer an efficient way to gain exposure to the broad market, specific sectors, or specific assets without having to pick individual stocks or bonds one by one.