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Once a great contrarian, long-term buy, Chinese equities have gained significantly and are now closer to fair value. Value could be found in overlooked Chinese small caps. The iShares MSCI China Small-Cap ETF tracks the MSCI China Small Cap Index, but its high 0.59% expense ratio and 61% turnover rate raise concerns for long-term investors. Roughly 75% of ECNS's sampled holdings are profitable, but many exhibit low business quality.
iShares MSCI China Small-Cap ETF is rated a Strong Buy due to resilience against U.S. tariffs and attractive dividend yield. ECNS benefits from high diversification, a stable 4.5% yield, and sector exposure to less volatile industries like healthcare and industrials. Chinese companies, including the fund's constituents, are adapting to tariffs by shifting supply chains and markets, lessening the intended U.S. tariff impact.
Getting emerging market exposure is a viable option in the current market environment. That's especially so given the global de-dollarization and prospect of further rate cuts by the Federal Reserve.
The iShares MSCI China Small-Cap ETF (ECNS) offers exposure to Chinese small caps but suffers from high volatility, poor tracking capabilities, and significant underperformance. ECNS's annual turnover and volatility are much higher than typical ETFs, and its sector allocation leans heavily toward low-growth healthcare stocks. Despite a decent 4% yield and a significant valuation discount to peers, ECNS's risk-adjusted returns lag both Chinese large-caps and EM small-caps.
MCHI, with over $7B in AUM, covers around 550 Chinese stocks, most of which are giant-caps and come in varied share classes. We highlight who MCHI would be best suited for. There are some key risks associated with this ETF that investors should be aware of.
Chinese companies are being encouraged to return cash to shareholders - and are finding good reasons to do so. Regulators are encouraging companies to focus on shareholder returns, and changing macroeconomic conditions are making it easier for Chinese companies to pay dividends. Given the risks, we think an active investing approach is especially important when investing in high-dividend Chinese stocks.
India small-caps only recently took the lead on the US, with a big jump higher over the last 18 months or so. Small-caps in other countries have been poor options for US investors relative to owning something like the S&P 500 ETF.
The latest figures published by the People's Bank of China show that credit and liquidity are stalling as demand for new loans declines. Deteriorating confidence in China's prospects explains why households prefer paying down debts while companies borrow less.