ETFs To Play The Chinese IPO Boom

by on May 15, 2013 | ETFs Mentioned:

While bullish momentum has dominated U.S. equity markets this year, Chinese stocks have not fared as well. In recent months, several key economic reports from the nation have come in below expectations, forcing the benchmark Shanghai Composite Index to fall more than 2% year-to-date. But for those willing to stomach a higher level of risk, recent developments from China’s security regulator may provide some intriguing opportunities for investors [see Single Country ETFs: Everything Investors Need To Know]. 

Chinese IPOs Coming Soon

As a result of recent policy changes and pent-up demand, the Chinese market may see a huge wave of IPOs in the near future. And while there are some reservations from investors about new Chinese issues, the current market’s low prices may present attractive buying opportunities for those risk tolerant investors.

In November, the China Securities Regulator Commission had announced that it had China IPOsover 800 companies lining up for an IPO, and since then nearly one-fifth of lesser-quality listings have been weeded out. This has helped shore up some confidence among investors who voiced concerns over the likelihood of the wave of new IPOs repeating their recent boom-to-bust history.

For those looking to tap into this opportunity, there are several small-cap China ETF options that could benefit from the IPO boom over the long-term [see also How To Pick The Right ETF Every Time]:

  • China Small Cap ETF (HAO, A-): This ETF is by far the largest and most popular option for gaining exposure to small cap Chinese equities. HAO maintains a portfolio of roughly 250 individual securities, featuring exposure to several sectors including industrials, consumer cyclicals, basic materials and real estate.
  • MSCI China Small Cap Index Fund (ECNS, A): Though in terms of assets, ECNS is significantly smaller than HAO, the fund does offer a deeper portfolio of over 330 holdings. Investors should note, however, that nearly three-quarters of total assets are allocated to mid-cap stocks.

The chart below highlights the historical performance of these two small-cap ETFs against their large-cap counterpart: the FTSE China 25 Index Fund (FXI, A) [see also Asia-Centric ETFdb Portfolio]:

The Bottom Line

Though 2011 was a rough year for all Chinese equities, the three aforementioned ETFs managed to bounce back in 2012, posting attractive double digit returns. Year-to-date, however, the small-cap ETFs have managed to log in modest gains, while FXI has lost more than 5%. Whether or not you are interested in tapping into the upcoming lineup of IPOs, investors should still keep a close eye on HAO and ECNS in the coming months to see the impact of China’s new wave of IPOs.

Follow me on Twitter @DPylypczak.

[For more ETF analysis, make sure to sign up for our free ETF newsletter]

Disclosure: No positions at time of writing.