iShares MSCI China Small-Cap ETF

ECNS

Market cap $103M

Once a great contrarian, long-term buy, Chinese equities have gained significantly and are now closer to fair value. Value could be found in overlooked Chinese small caps. The iShares MSCI China Small-Cap ETF tracks the MSCI China Small Cap Index, but its high 0.59% expense ratio and 61% turnover rate raise concerns for long-term investors. Roughly 75% of ECNS's sampled holdings are profitable, but many exhibit low business quality.

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iShares MSCI China Small-Cap ETF is rated a Strong Buy due to resilience against U.S. tariffs and attractive dividend yield. ECNS benefits from high diversification, a stable 4.5% yield, and sector exposure to less volatile industries like healthcare and industrials. Chinese companies, including the fund's constituents, are adapting to tariffs by shifting supply chains and markets, lessening the intended U.S. tariff impact.

Despite mounting macro headwinds at the start of the year, Chinese equities have continued to deliver positive performance. While near-term flows can provide further upside, the durability for the equity rally will hinge on policy choices ahead.

Getting emerging market exposure is a viable option in the current market environment. That's especially so given the global de-dollarization and prospect of further rate cuts by the Federal Reserve.

The iShares MSCI China Small-Cap ETF (ECNS) offers exposure to Chinese small caps but suffers from high volatility, poor tracking capabilities, and significant  underperformance. ECNS's annual turnover and volatility are much higher than typical ETFs, and its sector allocation leans heavily toward low-growth healthcare stocks. Despite a decent 4% yield and a significant valuation discount to peers, ECNS's risk-adjusted returns lag both Chinese large-caps and EM small-caps.

MCHI, with over $7B in AUM, covers around 550 Chinese stocks, most of which are giant-caps and come in varied share classes. We highlight who MCHI would be best suited for. There are some key risks associated with this ETF that investors should be aware of.

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Sentiment remains fragile in China and Hong Kong stock market even China services activities have improved in December. Weak market breadth and a persistent bearish trend of the Chinese yuan since November has added to more woes to the Hang Seng Index.