Investors bid Chinese exchange-traded funds (ETFs) to a multi-year high Wednesday as uncertainty surrounding the U.S. election result played out. As well as providing an opportunity to diversify risk, China's stocks remain underpinned by recovering domestic corporate earnings and an economy that continues to build momentum.
- Recovering corporate earnings and a rebounding economy may lead to further gains in Chinese stocks.
- A breakaway gap on above-average volume in the iShares China Large-Cap ETF (FXI) may act as a catalyst for additional follow-through buying.
- The iShares MSCI China ETF (MCHI) broke out above a period of three-week consolidation on the highest volume in nearly four months.
Beijing's push to boost consumption along with the People's Bank of China's (PBOC) commitment to providing liquidity as well as a range of market reforms to encourage foreign investment all bode well for company profits. Meanwhile, China is on track to be the only major economy to report economic growth in 2020. In late October, economists polled by Reuters projected the country's fourth quarter gross domestic product (GDP) to grow 5.8% year over year before surging 8.4% in 2021.
Active traders can gain exposure to Chinese stocks through the two China-focused ETFs outlined below. Let's take a closer look at the metrics of each fund and analyze their charts to identify possible trading opportunities.
iShares Trust - iShares China Large-Cap ETF (FXI)
Created in 2004, the iShares Trust - iShares China Large-Cap ETF aims to provide a similar return to the FTSE China 50 Index – a benchmark comprising 50 large-capitalization Chinese stocks traded on the Hong Kong Stock Exchange (HKSE). Leading names in the fund's basket of 52 holdings include shopping platform Meituan (MPNGF), technology conglomerate Tencent Holdings Limited (TCEHY), and financial powerhouse China Construction Bank Corporation (CICHY). Trading wise, the ETF turns over more than 16 million shares per day on a razor-thin 0.02% average spread. As of Nov. 5, 2020, FXI controls $3.5 billion in total assets, yields 2.5%, and has gained 9.67% over the past three months. By comparison, the S&P 500 index has added 3.44% over the same period. The fund charges a 0.74% management fee.
The ETF's share price staged a breakaway gap on above-average volume Wednesday to reach a two-year high – a move that may act as a catalyst for additional follow-through buying in the days ahead. Those who intend to play short-term upside momentum should consider using a trailing bar stop to book profits. To implement this strategy, remain in the position until the price closes beneath the prior day's low. Alternatively, traders could wait for a "buy the dip" entry point on a retracement back to the breakout point at $45.30.
Buy the dip means buying when the price of a security drops in order to profit from a potential future price rise.
iShares MSCI China ETF (MCHI)
With assets under management (AUM) of nearly $6 billion and a 0.59% expense ratio, the iShares MSCI China ETF seeks to track the performance of the MSCI China Index. The fund provides a relatively diversified bet on China H-shares and B-shares across all market cap sizes with its portfolio of over 600 holdings. Still, tech giants Alibaba Group Holding Limited (BABA) and Tencent command almost 35% of the ETF's assets. Traders can enter and exit positions easily, given daily liquidity of over 3 million shares and narrow penny spreads. MCHI has returned 9.15% over the past three months and offers a 1.1% dividend yield as of Nov. 5, 2020.
Since bottoming out at $50 in mid-March, the shares have trended consistently higher, with only one minor pullback to the 50-day simple moving average (SMA) during September. More recently, the price broke out above a period of three-week consolidation yesterday on the highest volume in nearly four months. Additionally, the moving average convergence divergence (MACD) indicator line crossed back above its trigger line to generate a buy signal. Trading wise, consider using a trailing stop here also to bank profits. For instance, consider staying in long positions until the price closes below a fast period moving average, like the 10-day SMA. Conversely, retracement traders could place limit orders near the $79 breakout level.
A long position – also known as simply "long" – is the buying of a stock, commodity, or currency with the expectation that it will rise in value.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.