While bullish momentum has dominated U.S. equity markets this year, Chinese stocks have not fared as well. In recent months, several key economic reports from the nation have come in below expectations, forcing the benchmark Shanghai Composite Index to fall more than 2% year-to-date.

But for those willing to stomach a higher level of risk, recent developments from China’s security regulator may provide some intriguing opportunities for investors [see Single Country ETFs: Everything Investors Need To Know]. 

Chinese IPOs Coming Soon

As a result of recent policy changes and pent-up demand, the Chinese market may see a huge wave of IPOs in the near future. And while there are some reservations from investors about new Chinese issues, the current market’s low prices may present attractive buying opportunities for those risk tolerant investors.

In November, the China Securities Regulator Commission had announced that it had
over 800 companies lining up for an IPO, and since then nearly one-fifth of lesser-quality listings have been weeded out.

This has helped shore up some confidence among investors who voiced concerns over the likelihood of the wave of new IPOs repeating their recent boom-to-bust history.

For those looking to tap into this opportunity, there are several small-cap China ETF options that could benefit from the IPO boom over the long-term.

▪ China Small Cap ETF (HAO): This ETF is by far the largest and most popular option for gaining exposure to small-cap Chinese equities. HAO maintains a portfolio of roughly 250 individual securities, featuring exposure to several sectors including industrials, consumer cyclicals, basic materials and real estate.

▪ MSCI China Small Cap Index Fund (ECNS): Though ECNS is significantly smaller than HAO in terms of assets, the fund does offer a deeper portfolio of over 330 holdings. Investors should note, however, that nearly three-quarters of total assets are allocated to mid-cap stocks.

The Bottom Line

Though 2011 was a rough year for all Chinese equities, the aforementioned ETFs managed to bounce back in 2012, posting attractive double digit returns. Year-to-date, however, the HAO fund was up just 2.29 percent as of May 14, while the ECNS fund was up 8.49 percent. Whether or not you are interested in tapping into the upcoming lineup of IPOs, investors should still keep a close eye on HAO and ECNS in the coming months to gauge the impact of China’s new wave of IPOs.

Daniela Pylypczak writes for ETFdb, which offers a comprehensive and original ETF database and analytical consulting services for advisors and investors, as well as a free newsletter. Learn more about their services by visiting ETFdb.com.  Disclosure: the author had no positions in the securities named in this article at the time of writing.