Earnings Season Highlights Emerging Market Financial ETFs

by on March 23, 2010 | ETFs Mentioned:

For much of 2010, investors around the world have scoured any release of data or news from the Chinese government in an attempts to glean information on Beijing’s plans for implementing monetary tightening. China is expected to account for a significant portion of global GDP growth in 2010, and has become an important trade partner for several developed and emerging markets. Investors have worried that a slowdown in Chinese consumption could ripple through international equity markets.

The peak of earnings season in the U.S. may have passed, but this week marks the beginning of this critical time for Chinese banks, with several major financial institutions set to report full year and fourth quarter 2009 results. In addition to digesting profit numbers from the previous year, investors are expected to scrutinize balance sheets after S&P said that increases in bad loans could put pressure on Chinese banks. “The earnings of Chinese banks may deteriorate and capitalization levels could moderate over the next two to three years as a significant rise in credit losses stemming from new loans starts to emerge,” said an S&P report. “But we don’t expect the banks’ financial metrics to weaken enough to change our ratings.” China’s banks had a total nonperforming-loan ratio of 1.58% at the end of 2009, a ratio that has steadily declined from more than 8% in 2005.

Investors should also be curious to hear any guidance for the upcoming year. Last year was seen as a relatively bad year for Chinese banks, as a series of interest rate cuts enacted in late 2008 depressed interest rate margins and weighed on profits. In aggregate, analysts expect Chinese banks to report their slowest year-over-year growth in profits since 2004. But interest margins are expected to begin rising this year, potentially boosting profit margins at Chinese banks. “Profits at the 14 listed banks, some of the biggest in the world by market value, are expected by analysts to rise by more than a fifth in 2010 as China’s unwinding of its massive stimulus measures helps interest margins recover,” writes Michael Wei.

Bank of China, the country’s third largest lender by assets, kicks off the action on Tuesday. BOC is expected to report that 2009 profit rose almost 25% over the previous year. Industrial & Commercial Bank of China, the world’s biggest bank by market cap, is expected to report an increase in profits of about 17%. China Construction Bank is expected to deliver similar results.

ETFs In Focus

Given China’s importance to the post-recession global economy, the upcoming earnings reports could have an impact on equity and bond markets around the world. But some ETFs will be affected much more than others (for more ways to play the news through ETFs, sign up for our free ETF newsletter). Below, we profile three that could be on the move depending on the results of earnings season.

  • Global X China Financials ETF (CHIX): This ETF tracks the S-BOX China Financials Index, a benchmark that includes about 27 Chinese banks and insurance companies. Several of the banks reporting earnings this week have major allocations in CHIX, including Bank of China (9.1%) and ICBC (9.7%). CHIX is just over three months old but has been a hit with investors, growing to more than $40 million in assets during its brief existence.


  • Emerging Markets Financials Titans Index Fund (EFN): This ETF allocates about 35% of its holdings to Chinese banks, but also maintains exposure to financial institutions in about seven other emerging markets (Brazil, . EFN is designed to track the performance of the Dow Jones Emerging Markets Financials Titans Index, a benchmark that includes several of the banks reporting earnings over the next week (read more about the investment case for emerging markets financials here).


  • iShares MSCI Emerging Markets Financials Index Fund (EMFN): This relatively new ETF (it was launched in February) tracks the performance of the MSCI Emerging Markets Financials Index, a benchmark that includes banks, insurance companies, and other financial firms. Compared to EFN, this ETF gives a greater allocation to Taiwan and South Korea and less to the BRIC bloc of countries.

Disclosure: No positions at time of writing.