These ETFs Topped Peers by Riding a Surge in Chinese Consumers

  • The summer stock rout wasn't enough to crimp this year's gains
  • Online shopping and incomes have been soaring in China

The year’s best performing exchange-traded funds are linked to China. Yes, China.

Consider this: Three of the world’s top five ETFs with market caps above $100 million track stocks tied to the nation, out of more than 750 globally. They follow booming shares such as household-appliance firm Suning Commerce Group Co. and Leshi Internet Information & Technology Corp., whose LeTV just won some rights to broadcast English soccer league games. While the ETFs dropped in the third quarter, they’re still up more than 27 percent for the year.

“The China consumption story and Internet-related companies are hot topics,’’ said Zhou Hao, a senior economist in Singapore at Commerzbank AG in Singapore. “In this downward-trend market, the place to be is high-beta equities,” such as small, consumer-linked firms, he said.

Last quarter’s declines in the three funds in question -- the E Fund ChiNext Price Index ETF, Mirae Asset Tiger China Consumer ETF and China SME ETF -- weren’t enough to eradicate gains of as much as 165 percent this year. Those who invested in them at the start of 2015 still made the best picks.

The country boasting a population more than four times that of the U.S. has seen online shopping and incomes soar, helping consumer-discretionary and telecommunication stocks in the Shanghai Composite Index advance more than 16 percent on average this year. That’s an especially notable feat after a rout in China dragged the rest of the world’s equities down with it.

The other top performing funds, with gains of more than 25 percent, were the Lyxor ETF FTSE MIB Daily Leveraged and Mirae Asset Tiger Consumer Staples ETF. The latter focuses on stocks that generate most of their revenue in Korea.

Consumption has been powering China’s economy, contributing 60 percent to growth in the first half even as the country is forecast to expand at its slowest pace in 25 years. Mitigating the declines in the Mirae ETF was the fact that it tracks South Korean companies with exposure to China, such as Orion Corp., a foodmaker that counts it as its biggest market and AmorePacific Corp., a cosmetics company up 72 percent this year.

“If you know the market well enough and can figure out which industries you want to invest in and which you need to beware of, you can get some really good returns,” Mohit Bajaj, director of ETF trading solutions at WallachBeth Capital, said by phone from New York. “As financial and commodity sectors were not doing too great, consumer or Internet-oriented companies were not doing too bad.”

Concerns have been mounting that a slowdown in the world’s second-biggest economy will curb global growth, triggering last quarter the biggest declines in world equities in four years. Those risks remain, says Troy Gayeski, senior portfolio manager at SkyBridge Capital.

“China is an enigma; it has always been very hard to understand what’s really going on,” Gayeski said by phone from New York. “Not that the risk of hard landing looks more probable, it just seems like a silly time to start investing in things tied to Chinese growth.”

Further helping the E Fund ChiNext Price Index ETF, Mirae Asset Tiger China Consumer ETF and China SME ETF: They have almost no exposure to commodity producers and banks. Energy-related securities were some of the biggest decliners this year, with the VelocityShares Daily 3x Long Crude ETN and Boost WTI Oil 3x Leverage Daily ETP down more than 70 percent.

“One reason why some China-focused strategies may be outperforming others is due to the high dispersion of returns of different sectors in China,”  said Jay Jacobs, a research analyst in New York at Global X Funds, which manages about $4 billion in ETFs. “Simply allocating to the better-performing sectors could be the difference.”

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