Profit from China's Stimulus with this Infrastructure ETF - ETF News And Commentary

Zacks Investment Research
Posted: Sep 18, 2012 10:34 AM
Profit from China's Stimulus with this Infrastructure ETF - ETF News And Commentary

Seemingly, China’s economy is slumping as we head into the final quarter of the year as the annual growth rate for the world’s second largest economy is now around the 7.5%-8% level. While many nations would kill for this kind of growth, it represents a troubling trend for the one party state as it looks to transition to a new leadership in short order.

After all, without exceptional economic growth, the average Chinese might not be willing to tolerate the political repression, forcing the Chinese Communist Party to keep growth rates elevated in order to keep themselves safely in power. This could be an especially big problem if a number of the country’s key export markets, like the U.S. and Europe, remain weak, forcing export growth levels far lower and hampering growth (see Forget FXI: Try These Three China ETFs Instead).

While China could rely on consumers to help keep the economy afloat, this doesn’t really seem to be an option at this time, as imports are falling month-over-month suggesting that the Chinese economy is still not ready to rebalance towards a more domestic focus. In light of this, China looks poised to stimulate its economy once again with a massive infrastructure boost.

In its latest iteration, China watchers expect the nation to spend about one trillion yuan on subways, highways, airports, power plants, and a host of other key infrastructure projects. In total, the spending could reach as much as 2.1% of GDP, representing a sizable boost to the Chinese economy.

Clearly, with Europe and American facing an uncertain future, and with the Chinese consumer unwilling or unable to pick up the slack, a greater level of investment in fixed assets in the country is seen as the best course of action at this time (read Five Emerging Market Infrastructure ETFs for the Coming Boom).

This boost in investment could help to at least temporarily add to growth in China and possibly soften any hard landing in the country. It has also, along with the general risk on atmosphere as of late, helped to boost Chinese stock prices back up to more respectable levels after their weak showing in much of the summer period.

However, while most Chinese stocks have risen, investors could see the greatest value by targeting a little known segment of the China ETF world during this type of climate. This is because the Chinese government is clearly betting on more infrastructure spending at this time and is forgoing other avenues of growth. Due to this, investors might want to consider taking a closer look at the EG Shares INDXX China Infrastructure Index Fund (CHXX).

This fund tracks the Indxx China Infrastructure Index which is a benchmark of about 30 companies which are focused in on the infrastructure segment of the Chinese economy. Exposure is tilted towards industrials, but financials—and especially real estate—as well as basic materials comprise double digit allocations as well.

However, despite the product’s potential in this climate, CHXX isn’t exactly the most popular with just over $10 million in AUM, so bid ask spreads may be relatively wide. This could increase the total trading costs for the fund and make the product more expensive than the 85 basis point expense ratio (also see Gold ETFs: Why Bid Ask Spreads Matter).

Still, if investors can get over low trading issues, the product could be a great value as the trailing P/E is just 8.4 while the P/B is just over 1.1. Meanwhile, the ETF is a solid choice from a yield perspective as well, as the index is currently sporting a 3.1% payout, a level that is likely to soften the relatively high expense ratio.

 With this focus and the promise of more Chinese government investment, this sector could hold up better than most in the China ETF world. Given this, and the solid yield on CHXX, investors who want some China exposure but are concerned about the overall market may want to look to this fund as a relatively safe way to obtain exposure to the People’s Republic in a sector that seems poised to grow (see more in the Zacks ETF Center).

While it is true that China could abandon this approach or not follow through with as much in investment, the stakes are just too high for the nation as it changes its top leadership.  Thanks to this, CHXX, with its mid cap focus, could be a nice blend of growth and value that could hold up better than most China ETFs no matter what is happening in the broader global economy.   

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