Chinese script reversed this year, but good ETF ideas still exist

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This year, China’s renewed emphasis on industry-level regulations weighs on equities and associated exchange-traded funds. While the Chinese Communist Party (CCP) has a habit of targeting various industries, getting these groups to comply with government demands, investors have always been caught off guard by some of the activities of 2021.

China’s previous regulatory regimes have primarily targeted sectors and industries rich in state-owned enterprises, such as energy and financial services. However, this year’s crackdown has largely focused on private companies, crippling various exchange-traded funds, including the WisdomTree China ex-State-Owned Enterprises Fund (CXSE), In the process.

While the CXSE and competing Chinese ETFs have faced many challenges this year, the methodology of the WisdomTree fund could indicate that when this category of funds rebounds, the CXSE could be a winner. Additionally, it is helpful to remember that regulatory risk is not something new to investing in emerging markets.

“The Chinese stock market is not riskier than it was several years ago. His government was still working behind the scenes to guide the country’s economic growth and boost its market higher, ”said Morningstar analyst Daniel Sotiroff. “The Chinese Central Party was largely responsible for expanding its economy through a series of reforms that began in the late 1970s. Since then, it has relaxed or tightened restrictions as it saw fit, with implications – both good and bad – for investors. “

CXSE, which tracks the WisdomTree China ex-State-Owned Enterprises Index, has little exposure to sectors that were the epicenters of previous Chinese regulatory crackdowns and, as the name suggests, it shuns state-owned companies. This group of companies, whether in China or elsewhere, has been holding back the performance of emerging markets for years. Worse yet, the governments controlling these companies rarely align their interests with those of investors.

“Politicians who hold managerial positions or boards of directors in state-owned enterprises can influence operations in such a way as to jeopardize income but benefit a country’s economy or its citizens,” Sotiroff adds.

While 2021 hasn’t been a picnic for CXSE, the wind could improve as some Chinese consumer internet companies start to comply with Beijing mandates. In addition to the case of the WisdomTree ETF, following the weakening suffered by Chinese communications services and consumer cyclical stocks earlier this year, CXSE looks like a multi-factor idea because there is some value to be had without sacrificing rapid growth rates, and the fund’s holdings release higher levels of quality because the state does not run these companies.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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