Chinese stocks just saw worst week since October, but a few China ETFs are still beating the market

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Chinese stocks have taken investors on a ride this year.

Shanghai and Shenzhen have been the best performing global markets this year, with the Shanghai composite index rallying nearly 24% and the Shenzhen Component Index Fund ETF up over 34%.

But the Chinese market tanked this week, with the Shanghai index — which was up more than 30% as of last Friday — falling nearly 6%. That makes this the worst week for Chinese stocks since October.

Capital Economics, an independent research firm, attributed the weakness to comments made by China’s top decision-making body about the country’s economic stimulus plans. While Chinese officials said they would continue to support the economy, better-than-expected first-quarter GDP results sparked worries about potential near-term policy easing.

Even so, a number of exchange-traded funds pegged to the Chinese market are rallying — and even beating the S&P 500.

The iShares MSCI China ETF, the WisdomTree ICBCCS S&P China 500 Fund, and the WisdomTree China ex-State-Owned Enterprises Fund have all outpaced the S&P this year, up about 21%, 26% and 31% respectively.

And, according to WisdomTree Asset Management’s Executive Vice President and Global Head of Research Jeremy Schwartz, their advantages have a lot to do with the types of stocks they hold.

“WisdomTree’s all about modern alpha and being able to deliver excess returns. [For] China, being able to access the full range of securities is a form of modern alpha,” Schwartz said, highlighting how few direct competitors WisdomTree’s S&P China 500 Fund, which trades under the ticker WCHN, has in this area of the market.

“You had one ETF that was 50 stocks, it’s not any of the new tech-sector companies like the Alibabas and the Tencents, it didn’t have any of the A-shares, ” he said Monday on CNBC’s “ETF Edge.” “WCHN is 50% A-shares, which is a very different look than the MSCI China. And so we think it’s just a better beta security. It is a cap-weighted security.”

With U.S.-based and Hong Kong-listed companies in the mix, Schwartz said WCHN offers “the broadest beta solution in the marketplace today.” But outperforming even that is WisdomTree’s China ex-State Owned Enterprises Fund, which excludes government-owned Chinese entities.

“This was an example where there hadn’t been anyone who had ever created that kind of exposure,” Schwartz said. “There are still very few places where you can even get that information. We had to create our own database. And for … the main China ETF, it was 75-80% state-run banks and energy. This was a very different exposure and, really, 30% of all emerging markets have this.”

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