Invesco Golden Dragon China ETF (PGJ)

The Invesco Golden Dragon China ETF stands out right with its over 20% returns YTD, ahead of the Shanghai Composite and the S&P 500. Despite this, it's hard to fully get behind the PGJ story right now, as tariff flip-flops between the U.S. and China create uncertainty. Additionally, the Chinese economy continues to struggle, which can cast a shadow on the impressive growth in the technology sector.

As the U.S. wrestles China for AI dominance, investors are playing both sides.

Count stocks from China among this year's international standouts. Widely observed gauges of equities in the world's second-largest economy are outpacing both the S&P 500 and the MSCI Emerging Markets Index by comfortable margins since the start of this year.

A looming trade deal between the U.S. and China is bullish for the Chinese stock market. When Invesco Golden Dragon China ETF is compared to iShares China Large-Cap ETF, FXI appears to be a better choice. Seeking Alpha ETF Grades highlight the differences between PGJ and FXI.

April saw a sharp stock market drop due to Trump's aggressive new tariffs, especially on China.

I am bearish on China's long-term prospects, despite a recent 4.5% rise in the index since June 2024, due to government stimulus measures. The People's Bank of China's September stimulus included lower bank reserve requirements, mortgage rate reductions, and subsidized business loans, temporarily boosting markets. Recent market gains from the stimulus have retracted, highlighting persistent underlying issues in China's economy despite short-term boosts.

One of the top themes year-to-date has been China-focused technology ETFs. China technology stocks have surged on AI enthusiasm related to China startup DeepSeek's AI model launch.

Invesco Golden Dragon China ETF has underperformed with a volatile history and an annualized total return of only 4.7% since inception. PGJ is heavily concentrated in consumer discretionary stocks, making it highly sensitive to economic cycles and vulnerable during downturns. China's long-term structural challenges, including population decline, high household debt, and a housing market bubble burst, will likely hinder PGJ's future performance.

Chinese stocks appear undervalued and could offer diversification from US markets, which are currently priced for perfection. Valuations in China are much lower compared to the US, making it a contrarian buy, especially during periods of negative sentiment. Invesco Golden Dragon China ETF is holding mostly ADRs from technology companies, which comes with additional risks, which I am not comfortable with.

Exchange-traded funds overseas that track Chinese stocks continued their rally Wednesday even as mainland markets were shut for a week-long holiday.

Aggressive interest rate cuts by PBoC coupled with potential expansionary fiscal policies that target consumer spending have stoked positive animal spirits. Market breadth has improved on China CSI 300 and Hong Kong Hang Seng Index.

China ETFs have surged on the back of a blitz of stimulus measures by the country's government to revive the world's second-largest economy.

Although concerns over China's economic challenges remain rife, some billionaire investors are betting big on China ETFs.

The latest figures published by the People's Bank of China show that credit and liquidity are stalling as demand for new loans declines. Deteriorating confidence in China's prospects explains why households prefer paying down debts while companies borrow less.

Data came in generally in line or slightly weaker than forecasts, as weak confidence continued to depress investment and consumption. New home prices fell by -0.65% MoM in July, compared to a -0.67% MoM drop in June.

The People's Bank of China kept the one-year medium-term lending facility rate unchanged at 2.5% today, in line with market expectations. We believe that in conjunction with today's data releases and the start of rate cuts in other central banks such as the European Central Bank and Bank of Canada, the odds of a PBoC rate cut in the coming months have risen.