The turnaround of China’s stock market picked up speed in the second quarter of 2022 with ETFs tracking the world’s largest economy delivering significant outperformance over the three months.
It comes after China reached an inflection point on several key issues dragging on its economy, with COVID-19 lockdowns across the country starting to ease while the government continues to loosen fiscal measures at a time when western central banks move to tackle spiralling inflation.
Chinese equities rallied to their highest point since early March and the end of June, however, the CSI 300 index remains 10% down so far this year.
However, investors have been quick to capitalise on the stellar performance in Q2, with both China-A-Shares and their offshore equivalents recording double-digit returns.
Furthermore, there are signs regulation of China’s technology sector is becoming increasingly rationale following reports Chinese authorities are ending their probe into transport company Didi.
Stocks have been quick to show this sentiment, with four of the top-performing ETFs in Q2 focused on technology.
Topping the charts was the KraneShares CSI China Internet UCITS ETF (KWEB), which returned 16% in the three months to the end of June, according to JustETF.
KWEB, which tracks the CSI China Internet index, has seen inflows of $135m over the past three taking its assets under management to $733m, according to data from ETFLogic.
Following closely behind is the UBS ETF Solactive China Technology UCITS ETF (CHTE) which has returned 15% over Q2 and the HSBC Hang Seng Tech UCITS ETF (HSTE) which posted returns of 14.6%.
HSTE, which tracks the Hang Seng Tech index, follows the 30 largest listed technology companies in Hong Kong and has recorded $147m inflows over the past three months.
The next best performing ETF of Q2 was the Invesco MSCI China Technology All Shares Stock Connect UCITS ETF (MCTS) which returned 14.4% in the three months to the end of June.
Despite this, KWEB remains significantly down over one year, returning -42.2%, while CHTE, HSTE and MCTS are down -35.3%, -32.4% and -23.2%, respectively.
ETFs without a technology tilt also found themselves high up the performance charts, with the Xtrackers Harvest FTSE China A-H 50 UCITS ETF (AH50) and the UBS MSCI China ESG Universal Low Carbon Select UCITS ETF (CNSG) returning 13.1% and 12%, respectively.
Another ESG ETF, the VanEck New China ESG UCITS ETF (CEBG) returned 11.2% over Q2, just behind the KraneShares MSCI China A-Shares UCITS ETF (KA50) which recorded 11.9% returns.
Away from China, a special mention should go to the SparkChange Physical Carbon EUA ETC (CO2P) which was the third-best performing exchange-traded product (ETP) of Q2, returning 14.6%.
Floating rates and short-duration bonds deliver
With monetary policy tightening and risk appetite declining elsewhere, one area that has allowed investors to ride the wave of hawkish policymakers has been floating-rate ETFs.
The sector is ideally suited to a rate hiking backdrop and the performance charts highlight this.
The WisdomTree USD Floating Rate Treasury Bond UCITS ETF (TFRN) returned 9% in the three months to the end of June.
ETFs following a similar strategy, the Xtrackers Fed Funds Effective Rate Swap UCITS ETF (XFFE) and the Lyxor Fed Funds US Dollar Cash UCITS ETF, which track a daily rolling exposure to the Federal Funds Effective Rate, both returned 8.9% over the same period.
Elsewhere within the fixed income space, ultrashort ETFs also recorded strong returns, led by the JP Morgan BetaBuilders US Treasury Bond 0-3 Months UCITS ETF (BBM3) and the iShares $ Ultrashort Bond UCITS ETF (ERNU) which both returned 8.8% in Q2.
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