Luxury Stocks Soar with China Stocks: Here Are 3 ETFs to Invest
Buying luxury-related stocks is comparable to buying China stocks—at least that was the case over the past week. When Chinese stocks rallied, with the MSCI China index up 18.55%, LVMH's share price also surged 18.84%. While it's known that Chinese consumers are significant buyers of luxury goods, this level of correlation between luxury brands and Chinese stocks hadn't been as evident until now.
And it wasn't just LVMH; brands like Prada, Kering, and Hermes followed a similar trend. This demonstrates how heavily luxury brands depend on Chinese consumption. China is a massive market with considerable wealth, and the cultural emphasis on 'face value' makes the Chinese consumer a prime target for luxury brands. In fact, many of these companies derive the bulk of their revenue from the Asia-Pacific region. It's also worth noting that Chinese tourists frequently travel to Europe to purchase luxury items. One thing is clear: the fortunes of luxury brands are closely tied to the wallets of Asian consumers.
The good news for investors is that many luxury brand stocks have experienced declines, and they are not currently overvalued. This presents a potential turnaround opportunity if Chinese consumption continues to rebound.
Most of these luxury stocks, such as Hermes and LVMH, are listed in Paris. However, they also have OTC versions available in the U.S. If you don't have access to European-listed stocks or are uncomfortable with OTC investments, there are three luxury ETFs you can consider.
#1 Tema Luxury ETF (LUX)
Tema is a new asset manager that launched in 2023, specializing in actively managed ETFs. Our focus here is the Tema Luxury ETF (LUX), which goes beyond the typical fashion brands associated with luxury. In addition to fashion, the ETF includes luxury cars like Ferrari and experiences such as the Four Seasons Hotel.
The investment process begins by screening global consumer goods, narrowing down to 160 luxury stocks using proprietary selection criteria. From there, the portfolio is refined to 30-40 stocks through fundamental analysis, focusing on:
Strong business models
High returns on capital
Competent management
Strong balance sheets
Sustainable cash generation
Attractive valuation relative to ROIC and growth
As of September 27, 2024, the top 10 holdings include well-known brands like Hermes and LVMH, luxury car companies like Ferrari and Mercedes, and hotel chains such as Hilton and Marriott. The ETF currently holds a large portion in cash that is yet to be deployed, but the top holdings represent familiar, high-quality luxury names.
The expense ratio for LUX is 0.75%, which is typical for an actively managed ETF.