The US-China strategic rivalry is increasingly being felt in the world of finance. The situation poses a quandary for Wall Street. Patriotic investors want the gains of the Asian giant without selling out on Uncle Sam. Yet few reliable options exist for such a strategy.
In August, the Biden administration moved forward with an executive order restricting U.S. investment in key Chinese technologies. Yet some Republican hardliners want the ban to extend to public markets.
This leaves little but stark choices for investors. Yet, can Chinese-based profits and American values really not coexist?
Now, one exchange-traded fund (ETF) claims it can thread the needle.
The Core Values Alpha Greater China Growth ETF (“CGRO”) recently launched on the New York Stock Exchange Arca, claiming to offer “China investing through an ‘America first’ lens.”
Portfolio manager Ben Harburg lays out the fund’s investment thesis.
“China’s market fundamentals remain strong,” says Harburg. “The country still has a long growth curve ahead of it, particularly relative to the U.S.” However, he stressed that “exposure to China must not be obtained through investment in companies or vehicles that compromise U.S. national security interests, American values, nor its position as a global economic and technological leader.”
“CGRO… helps ensure the companies in the fund’s portfolio are positioned to deliver alpha… But not to the detriment of the U.S.”
Risky Business
The CGRO team uses a process to weed out problematic firms. The CGRO team first selects stocks with the highest alpha with significant business presence in China. Then, a board of China specialists measures the firm’s ties to the Chinese military, repression of civil liberties, and potential susceptibility to U.S. sanctions, a cumulative score is issued through the CVA China Risk Scorecard.
The fund’s managers then construct a portfolio, aiming for “secure exposure to China alpha.”
The fund currently has 41 holdings. These aren’t limited to Chinese firms per se but may also be U.S. or other non-Chinese companies with meaningful exposure to China. For instance, Taiwanese firm Taiwan Semiconductor Manufacturing Corporation is its third-largest, comprising 5.22% of the portfolio.
“Most China focused ETFs listed in the U.S. take a passive, index-tracking approach,” said VettaFi’s Head of Research, Todd Rosenbluth. “This new ETF gets actively managed. Beyond that, it has discretion about what companies are part of the portfolio.”
As the broader active ETF trend gains momentum, China funds could follow in the slipstream. Just last week, fund manager Neuberger Berman launched an active China ETF, the Neuberger Berman China Equity ETF (NYSE Arca: NBCE), which targets high-quality companies tied economically to China.
Uncertain Outlook
Overall, China has underwhelmed investors this year. The leading MSCI China Index – which tracks the vast majority of China stocks – is down over 13% year-to-date.
The outlook remains cloudy. Fears of a decades-long Japan-style stagnation still linger. Yet, there are signs a modest rebound may be around the corner.
The latest economic data from the country shows China’s economy grew by 4.9% year-on-year in the third quarter, beating market expectations. The Economist Intelligence Unit (EIU) predicts China’s economy has “already bottomed out” and that price stability and core inflation will start to recover. The EIU foresees China achieving 5.2% real GDP growth for 2023 before trending consistently below 5% through the remainder of the 2020s.
Investors will have to weigh their expectations about China’s long-term competitiveness and assess carefully whether this is the best vehicle by which to access this mega-market.
CGRO comes with an expense ratio of 0.75%.