China's CSI 300 Index surged to a five-year high last week as upbeat economic data pointed to recovering activity in the world's second largest economy. The positive market sentiment carried into Monday, with Chinese stocks gaining another 5.67% by the Shanghai close – their largest one-day rise since February 2019 – on hopes of an economic rebound.
The country's closely watched Caixin Manufacturing Purchasing Managers Index (PMI) and Caixin Services PMI both registered above 50 in June, indicating expansion in two areas hit hard by the pandemic. Meanwhile, talk of a healthy bull market by the state-run China Securities Journal added to the optimism. "Individual investors in China are really optimistic about the economic reopening," said Kingston Securities' Dickie Wong, per The Financial Times.
Traders can gain exposure to Chinese stocks through the three exchange-traded funds (ETFs) outlined below. Let's review the metrics of each fund and use technical analysis to identify several trading opportunities.
iShares China Large-Cap ETF (FXI)
Launched in 2004, the iShares China Large-Cap ETF (FXI) aims to provide a similar return to the FTSE China 50 Index – a benchmark comprising 50 large-cap Chinese stocks traded on the Hong Kong Stock Exchange (HKSE). The $3.05 billion fund tilts heavily toward financials, allocating almost 40% of its assets to the economically sensitive sector. Average daily turnover of over 20 million shares on tight penny spreads makes the fund a popular choice in the Chinese equity ETF space. Although FXI is trading 4% lower year to date, it has rebounded 13.33% since early April as of July 6, 2020. Investors also receive a healthy 3.08% dividend yield.
The ETF's share price broke above a period of one-month consolidation Thursday that may act as a catalyst for further short- to mid-term upside. Furthermore, the moving average convergence divergence (MACD) indicator sits poised to generate a buy signal in Monday's session by crossing above its trigger line. Those who buy here should consider setting a profit target near the fund's 52-week high at $44.92 and limit downside risk with a stop placed just below the breakout area at $41.
iShares MSCI China ETF (MCHI)
With assets under management (AUM) of $25.29 billion and offering a 3.4% dividend yield, the iShares MSCI China ETF (MCHI) seeks investment results that generally correspond to the MSCI China Index. Chinese technology giants Alibaba Group Holding Limited (BABA) and Tencent Holdings Limited (TCEHY) carry a combined weighting of 32%, making the ETF particularly suitable for those who want exposure to those companies. Trading wise, a daily volume of nearly 4 million shares, coupled with an average 0.02% spread, keeps transaction costs low and provides ample liquidity. As of July 6, 2020, MCHI charges a competitive 0.59% management fee and has gained 20% over the past three months. Year to date, the fund has returned 3.41%.
MCHI shares climbed to a multi-year high in Thursday's session – a move that could fuel ongoing momentum-based buying this week. Those who play the breakout should look for a test of the early 2018 high around $74 while guarding against a sudden reversal with a stop placed beneath the July 1 low at $65.82. The trade offers a risk/reward ratio of over 1:2, assuming a fill at Thursday's $68.24 closing price ($2.42 risk per share vs. $5.76 reward per share).
Invesco Golden Dragon China ETF (PGJ)
Created in 2004, the Invesco Golden Dragon China ETF (PGJ) tracks the performance of the NASDAQ Golden Dragon China Index – a market-cap weighted group of 63 Chinese stocks. The fund invests only in U.S.-listed companies that generate the majority of their revenues in China. As a result, PGJ significantly underweights financials due to China's large state-owned banks not trading on U.S. exchanges. Consider using limit orders when placing trades to combat the ETF's slightly wider 0.61% bid-ask spread and sporadic trading volumes. The fund controls net assets of $164.87 million, charges a 0.70% management fee, and is up 22% on the year as of July 6, 2020.
PGJ shares rose to a new all-time high last week after breaking out from a tightly formed pennant continuation pattern. Active traders who enter at these levels should consider using a fast-period moving average trailing stop to let profits run as far as possible. To use this technique, remain in the trade until price closes below the 10-day simple moving average (SMA).