China-focused ETFs struggle amid fears of another regulatory ‘crackdown’

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It’s a dismal start to the year for several China-focused exchange-traded funds. 

Shares of the iShares MSCI China ETF
MCHI,
which has $5 billion of assets under management, have tumbled 9.7% this month through Wednesday, FactSet data show. Like other China ETFs, the fund is struggling after suffering losses in each of the past three years. 

Beijing’s financial work conference earlier this week sparked investor fears that a regulatory “crackdown” on the country’s financial sector is coming, said Marko Papic, chief strategist at Clocktower Group, in a phone interview. The concern is that the Chinese government will be “heavy-handed” in carrying out “significant regulatory activity” just as China is “in the middle of private-sector deleveraging,” said Papic.

“We’ve seen this picture before,” he said, citing the country’s crackdown in 2021 on technology companies. But this time, Papic fears a “double whammy,” explaining that regulatory action targeting the financial sector may hurt lending by banks, which are the “blood of the economy.”

The KraneShares CSI China Internet ETF
KWEB,
also with $5 billion of assets, has seen its shares plunge 11.8% this year through Wednesday, while the iShares China Large-Cap ETF
FXI,
which has $4 billion under management, has dropped 10.7% over the same period, according to FactSet data.

“Everybody is looking for a reason to buy Chinese stocks because they’re cheap,” said Papic. But the “constant throwing of regulatory sand in the gears,” he said, “makes it very difficult for us to tell our clients that there’s any fundamental reason to be bullish” on Chinese assets.

The iShares MSCI China ETF provides exposure to shares of large and midsize companies in China, while the iShares China Large-Cap ETF focuses on large-cap stocks in the country and the KraneShares CSI China Internet ETF tracks shares of Chinese internet companies listed overseas.

As for other ETFs that invest in Chinese companies, shares of the Invesco China Technology ETF
CQQQ
and Invesco Golden Dragon China ETF
PGJ
have each plummeted more than 13% this month through Wednesday, while the Xtrackers Harvest CSI 300 China A-Shares ETF
ASHR
dropped 7.5% over the same stretch, according to FactSet data. 

As usual, here’s your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good…

…and the bad

New ETFs

• Roundhill Investments said Thursday that it launched the first bitcoin covered call strategy ETF in the U.S., the Roundhill Bitcoin Covered Call Strategy ETF
  YBTC.
  The fund aims to provide investors exposure to an ETF investing in bitcoin futures contracts, while “potentially generating monthly options income,” according to the announcement. Investors’ exposure to bitcoin, which historically has seen “significant volatility,” would be subject to an “upside cap,” the firm said.

• Calamos Investments announced Jan. 16 that it launched the Calamos CEF Income & Arbitrage ETF
  CCEF,
  an actively managed ETF that seeks to buy “distribution-producing closed-end funds to deliver high monthly income streams with capital appreciation potential.” 

• F/m Investments said Jan. 17 that it launched U.S. Credit Series ETFs that track an investible index in investment-grade credit, including the F/m 2-Year Investment Grade Corporate Bond ETF
  ZTWO,
  F/m 3-Year Investment Grade Corporate Bond ETF
  ZTRE
  and F/m 10-Year Investment Grade Corporate Bond ETF
  ZTEN.

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