What to expect from China ETFs post-Lunar New Year

How do funds that track the world's largest emerging economy perform after its biggest holiday?

By Benzinga Feb 8, 2013 5:22PM
China copyright Digital Vision Ltd., SuperStockBy The ETF Professor 

Hong Kong's Hang Seng will be closed for three days next week, while the Shanghai Composite will be closed the entire week in observance of the Chinese New Year.

As participants in the financial markets frequently note, past performance is no guarantee of future returns, but it is worth noting that human behavior does not change and patterns repeat. That is to say it is time to have a look at how some marquee China exchange-traded funds have performed immediately following past Lunar New Years.

iShares FTSE China 25 Index Fund (FXI) The iShares FTSE China 25 Index Fund is a credible option to start with, not because it is the biggest China ETF, but because it is the oldest. That means there are plenty of post-New Year performances to evaluate. In fact, there are nine we can look at.

FXI traded sideways for about a month after its first Chinese New Year in 2005 and made a small gain following the 2006 celebration. In 2007, FXI dropped a bit after the New Year, but that proved to be a buying opportunity ahead of one of its best multi-month runs ever.

As the global financial crisis got going in early 2008, FXI suffered a double-digit loss following the Lunar New Year. The following year, the ETF took a small loss as U.S. stocks were attempting to find a bottom. In 2010, FXI delivered returns of about 14% over the six weeks following the New Year. The following year FXI jumped from just under $43 to $45.50 in the six weeks following the holiday.

Last year, FXI took a small loss after the holiday, which was a sign of ugliness to come. However, in three of the past four years, the largest China ETF has performed well following the Chinese New Year.

Guggenheim China Small Cap ETF (HAO) HAO is the dominant fund among China small-cap ETFs and offers a decent track record of post-Chinese New Year performances as 2013 will be the sixth for the fund. HAO's first year in business was a case of bad timing as the fund slid about 25% in the six weeks following that Chinese New Year.

Like FXI, HAO traded lower following the holiday in 2009, but then more than doubled from March to August. HAO gained about $2 over the six weeks following the 2010 holiday, but lost roughly the same amount the following year. HAO gained about 8% in six weeks following last year's Lunar New Year.

Market Vectors China ETF (PEK) The Market Vectors China ETF, which uses various swaps and derivatives to give investors exposure to China's hard-to-access A-shares market, is an interesting case study even though it has only been around for two Chinese new years. In 2011, PEK was a decent post-holiday performer, but the ETF really impressed last year, gaining 11.7% in less than five weeks following the holiday.

While monthly seasonal trends are not easily spotted in China's A-shares market, there "appears to be a pattern of higher returns than average between February and June and lower returns than average between July and January," according to the academic publication, "Seasonality in the Returns, Volatility and Turnover of the Chinese Stock Markets."

That paper refers to the Chinese New Year as the Spring Festival and supports the proposition that it is meaningful to A-shares returns.

"Returns before the Spring Festival holiday are significantly higher than average. Most of this comes from the trading day before the holiday (measured by the open-to-close return), which, on average, is 0.84% higher than the average daily return. Using close-to-close returns, it appears that returns are also higher than average on the day immediately after the Spring Festival holiday, which is in contrast with evidence for other markets, where post-holiday returns are usually lower," according to the research.

Investors should note that the paper, authored by Zhiguang Cao, Richard D. F. Harris and Anxing Wang, was published in 2007, using a data set running from 1994 to 2006.

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