Exchange Traded Fund (ETF) And How You Can Use It To Your Advantage

As defined by Investopedia, an exchange-traded fund (ETF) is a collection of securities—such as stocks—that tracks an underlying index. The best-known example is the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index or the largetst 500 listed companies in the US. ETFs can contain many types of investments, including stocks, commodities, bonds, or a mixture of investment types. An exchange-traded fund is a marketable security, meaning it has an associated price that allows it to be easily bought and sold.

An ETF is called an exchange-traded fund since it’s traded on an exchange just like stocks. The price of an ETF’s shares will change throughout the trading day as the shares are bought and sold on the market. This is unlike mutual funds, which are not traded on an exchange, and trade only once per day after the markets close.

In Singapore, you will probably have heard of the STI index and ETF like STI ETF (ES3.SI) which tracks the top 30 listed companies in Singapore.

An ETF can be seen as a basket of stocks grouped together by way of a market index or by way of an industry etc, so you have country index ETF or a healthcare ETF or Internet stocks ETF etc. There are a number of benefits of course when you invest in an ETF, especially when you are a retail investor. You enjoy a great diversification across many companies, and thus reducing the risks of individual stocks not performing.

China just celebrated their National Day and for this article, I want to discuss 2 ETFs, one is FXI (50 of the largest Chinese stocks) and the other one is KWEB (China-based companies whose business is internet-related).

china national day

First let’s discuss FXI. FXI seeks to track the investment results of an index composed of large-capitalization Chinese equities that trade on the Hong Kong Stock Exchange. You can see the top holdings as below:

FXI holdings

China’s GDP growth has slowed down but it is still growing at 6% plus. China is also the No.1 trading partner for all of South-east Asia’s economies. When you invest in individual stocks, you can carry out detailed valuation of the company and determine whether the stock is overvalued, fairly valued or under valued. For an ETF like FXI, one way is to look at the PE ratio which is 10.15 as of 27 September 2019. This to me is rather low when compared to say SPY which tracks the S&P 500 index, which currently has a PE ratio of 21.87. The S&P 500 Shiller PE ratio stands at 29.46!

FXI price is probably also dragged down by the trade war between US and China. Let’s look at it from a TA perspective and see if there is any opportunity to enter a trade.

FXI chart

There is a strong support at around $38 price level, so you can either wait for the price to drop down to $38 to initiate an investment or if you know about Options, you can start selling a put option at strike price $38 to collect some premiums.

The other very interesting ETF is KWEB. KWEB seeks to measure the performance of the investable universe of publicly traded China-based companies whose primary business or businesses are in the Internet and Internet-related sectors. From the KWEB fact sheet, we learn that:

China Internet Sector Highlights:

  • Chinese retail web sales totaled US$1.31 trillion in 2018 (compared to US$513.6 billion in the United States), representing an increase of 23.9%.
  • China’s internet population reached 829 million people, a penetration of only 59.6%. The U.S. internet population reached 287 million people, a penetration rate of 88.5%.
  • Total Chinese retail sales reached US$5.5 trillion in 2018
  • Online shopping accounted for 23.6% of retail purchases in China in 2018

There is still a lot of growth opportunity in this area and it will definitely be quite interesting to get into this high-growth internet-related and e-commerce ecosystem. Some of KWEB’s top holdings are Tencent, Alibaba, Meituan Dianping, Baidu, Pinduoduo, etc. I am personally vested in Alibaba (you can read the latest analysis here) but not the others and if I wish to have more exposure here, instead of investing in the individual stocks, I can choose to invest in KWEB. KWEB’s PE ratio stands at about 20. If I compare to a rough US equivalent, say FDN, its PE ratio is 45. As such, KWEB seems cheap to me.

Again, we look at the KWEB technical chart. There is a good entry point at around $39.

KWEB chart

October is known to be the most volatile month of the year for the stock market. When there is high volatility, it may mean trading or investment opportunities.

Journeywithmoney is holding a Stock Investment Workshop (sign up through this link) on 17 October and we invite you to understand the Stock Investment framework we use to analyze individual stocks, the power of Options strategies where you can earn regular monthly income while waiting for your target prices to reach. Below is our investment return last month for one of our portfolios. Both FXI and KWEB were traded.

Sep Returns

At Journey With Money, we are practitioners of Value Investing for Singapore and US stocks. We are passionate about sharing our Stock Investment knowledge and experience but the materials we present do not constitute stock recommendations and readers are urged to do their own due diligence for any investment decisions.

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