How to take advantage of China's new stimulus package with a 17% discount

When I show you a diagram like the one below, this is your first thought could Be it, for example, that we look at the recent stock performance of NVIDIA (NASDAQ:NVDA)– or perhaps a biopharma company that just brought a breakthrough treatment to market:

Not a tech stock – just a “boring” index fund

But you’re wrong. What we see here is this iShares MSCI China ETF (NASDAQ:MCHI)an index fund that tracks the Chinese stock market up to its peak early last week.

This increase is the direct result of the Chinese Communist Party’s recently announced economic stimulus package.

The gains have caught the attention of Chinese day traders and speculators as well as those in the West. But – as is often the case with China’s economic developments – there is still a lot of uncertainty here, as the Chinese government has given little information about what exactly it will do. This lack of detail led to a turnaround late last week that clouded but did not shake the optimistic view.

How are we? not-Do day traders benefit from this situation? The most obvious way is to buy Chinese stocks – although there is a lot of risk here as foreigners cannot do this direct.

There are ways to get around this, such as buying US-listed companies Alibaba (NYSE:BABA). But that increases the risk because with such stocks you don’t really have a stake in Chinese companies.

This may all sound surprising if you don’t follow Chinese stocks regularly, but Alibaba and other US-listed Chinese stocks are actually tied to something called a Variable rate companies which is registered in the Cayman Islands. So buying Alibaba is not just a bet on Chinese stimulus programs, but also on Chinese regulators respecting international law and recognizing the real claim of foreign investors on Chinese companies.

Another way to buy in is with an ETF like MCHI that invests broadly in Chinese assets, and we hope you can get out before this short-term madness ends. However, MCHI and similar ETFs are not your only option, nor even a particularly good one.

The CEF way to invest in China’s new stimulus package

The real problem with Chinese stocks is that while short-term gains are possible with such madness, the long-term performance of the Chinese market has been, frankly, terrible.

Chinese stocks are (far) behind the US

Chinese stocks have returned around a tenth of the S&P 500’s gains, so an investor who bought $10,000 worth of US stocks in 2011 would have $56,120 as of this writing, while the same amount in Chinese stocks would now be $13,026, leaving over $40,000 on the table.

The key takeaway here is that if you want to play this madness, you shouldn’t stay long or you’ll miss out on bigger wins elsewhere.

But if you’re still determined to give it a try, MCHI is not the best way to do this. To explain this, let’s look at this Morgan Stanley China A Share Fund (NYSE:CAF), a closed-end fund (CEF) that, like MCHI, invests in Chinese companies.

CAF is lagging behind the laggards (for now).

As you can see, CAF is underperforming MCHI this year, and the decline on the big run we talked about was much worse for the CEF than for the ETF. Why should an investor who wants to benefit from China’s stimulus package choose CAF?

The answer lies in the question itself. The excitement has boosted MCHI, the largest ETF tracking China’s stock market by market cap, but it still hasn’t spread to smaller, less popular Chinese funds. And since CAF is about one-twentieth the size of MCHI, with a market cap of just $275 million, it’s likely to remain a hidden gem of the Chinese stock market bustle for a while.

That may sound speculative. After all, how do I know that CAF doesn’t get as much attention as MCHI? Aside from the declining performance, there is also the discount to the net asset value (NAV or the value of CAF’s underlying portfolio):

The high discount means CAF offers better value for money than its ETF cousin

Let’s start with the purple line above: MCHI is trading at a 0.6% premium to NAV as of this writing. That shouldn’t happen. Typically, market professionals look for opportunities to sell an ETF at a premium and buy the fund’s underlying assets as this allows them to make immediate profits. This is why large index funds like S&P 500 ETFs always trade close to par.

This bounty shows us how difficult it is to get real Shares of Chinese companies have made this arbitrage opportunity difficult for all but the largest investors.

This, with its 17.2% discount, should encourage more speculators to buy CAF (discounts to NAV are common for CEFs as their shares tend to have a fixed number, while the value of the assets they represent fluctuates during trading hours). ).

Also keep in mind that CAF is trading at a similar discount to what it was before the trading boom. This means that unlike MCHI, CAF has not priced in China’s major economic recovery.

Of course, buying CAF means you have to be active, alert and ready to sell at any time. But that’s all part of day trading.

For this reason, we at my also prefer a longer-term, dividend-focused approach CEF Insider Service (as well as downplaying or avoiding Chinese stocks). Because when there are CEFs from across the economy (and around the world) that average returns of over 8%, there is simply no reason to go through the stress and workload of day trading.

Forget trying to time China’s troubled market. Do this for a consistent 9.8% payout.

CEFs are perfect for building the diverse portfolio and income stream we need to fund a low-stress lifestyle, whether we’re retired or working toward retirement.

This is where the four other CEFs that I recommend today come into play. They’re awesome an outsized dividend of 9.8% on average, and I see a lot of upside as their undeserved discounts disappear.

I’ve put together a special investor bulletin that gives you the inside scoop on CEF investing, including how CEFs generate huge returns And How buying a discounted CEF can lead to some truly groundbreaking advantage.

It’s exactly the kind of low-drama, high-dividend approach we need in these uncertain (to say the least!) times.

Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds in the US markets. Click here to learn how you can benefit from their strategies in the latest report, “7 Great Dividend Growth Stocks for a Secure Retirement.”

How to take advantage of China’s new stimulus package with a 17% discount

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