These Cannabis and China ETFs are Leading the 2019 Rally

Stock investors seeking even bigger returns than the 2019 bull rally might look at five ETFs that have already gained at least 40% year-to-date, approaching triple the 15% pace of the S&P 500. The winners include two ETFs focused on China, and ETFs focused on cannabis and cancer treatments: The VanEck Vectors ChinaAMC SME-ChiNext ETF (CNXT), the cannabis-themed ETFMG Alternative Harvest ETF (MJ), Xtrackers Harvest CSI 500 China A-Shares Small Cap ETF (ASHS), the biotech-based ARK Genomic Revolution Multi-Sector ETF (ARKG) and Reality Shares Nasdaq NexGen Economy China ETF (BCNA), according to a detailed story in CNBC.

See their performance this year in the table below.

5 Winning ETFS

(YTD Performance)

• The VanEck Vectors ChinaAMC SME-ChiNext; + 43.2%
• ETFMG Alternative Harvest; + 41.8%
• Xtrackers Harvest CSI 500 China A-Shares Small Cap; + 43%
• ARK Genomic Revolution Multi-Sector; + 42.3%
• Reality Shares Nasdaq NexGen Economy China; + 41%

Source: CNBC; data as of 4/8

Despite investor enthusiasm for these ETFs, these outperformers haven't always done so well. Cannabis stocks in particular had an extremely volatile end of 2018 on the back of Canada’s legalization of recreational cannabis. Meanwhile, Chinese equities suffered through a terrible year. The same year that the S&P 500 declined 6.2%, marking its worst performance in a decade, the Shanghai stock exchange dipped 25%. Now, the index is up more than 30%.

The equity rally has been accompanied by a massive influx of capital into ETFs, amounting to $2 billion in inflows last year, the biggest so far in 2019 and driven largely by equity ETF inflows, at $1.8 billion, per a Bank of America Merrill Lynch.

Here is a close look at 3 of these ETFs, per CNBC and Investopedia research.

John Davi, founder and CIO of Astoria Portfolio Advisors, says he’s “obviously” doubling down on China as it becomes a bigger part of the global economy, per CNBC. The investment officer says his vantage point is that China equities are cheap, trading at roughly 12 times earnings, compared to the S&P 500 at about 17 times.

“And if you look at earnings growth, you've got triple the amount of earnings growth for [the iShares MSCI China ETF, or MCHI] compared to the S&P 500. So risk-reward, you've got a margin of safety when you're buying China. So it's our biggest overweight in our portfolios. We like emerging markets," he told CNBC.

The MCHI top holdings include Tencent Holdings Ltd., Alibaba Group Holdings Ltd. (BABA), China Construction Bank Corp., and China Mobile Ltd.

CFRA director of ETF and mutual fund research Todd Rosenbluth likes marijuana ETFs including the Alternative Harvest fund. The ETF holds cannabis names like Aurora Cannabis Inc. (ACB), GW Pharmaceuticals PLC (GWPH), Cronos Group Inc. (CRON), Canopy Growth Corp. (WEED), and Tilray Inc. (TLRY). “[Cannabis is] not legal here in the United States on a federal level, and then there's a handful of states where it is, so you are investing in Canadian stocks — that's important — and you're investing in a thematic approach to it,” he said.

On the biotech front, the group is represented on the list of 2019’s top five performing ETFs by ARK Genomic Revolution Multi-Sector ETF, whose top holdings include Invitae Corp. (NVTA), Illumina Inc. (ILMN), Intellia Therapeutics Inc. (NTLA), Editas Medicine Inc. (EDIT), and Veracyte Inc. (VCYT). 

Much of the segment’s potential is still to be determined. "And so there's only so many places that ARK can go within this overall theme, but they can pare back if they're concerned about the prospects of individual companies as opposed to a traditional index-based product that has to stay fully invested in that theme,” said Rosenbluth.

Despite these five ETFs' stellar performance in 2019, these sectors are highly volatile and could pull back sharply given any change in sentiment or if negative market forces emerge. That's why the outlook for these leading ETFs may be as uncertain as the one for the broader market rally.