Although investors saw some uncertainty in the Chinese market to start the year, the country has turned it around recently. Stronger data and more optimism over some of the nation’s key trading partners (specifically in Europe) has led to a boom in Chinese shares as of late.
Thanks to this, we are finally starting to see some inflows for the China ETF market, and even some new products targeting the nation as well. This trend first started with some new KraneShares products, and it has now moved over to PowerShares and their new China A-Shares Portfolio .
New China ETF in Focus
This ETF, which will charge investors 50 basis points a year in fees, looks to offer up a fresh way of targeting the often forgotten China A-Shares market. A-Shares are generally hard to tap into since they require Qualified Foreign Institutional Investors, but PowerShares has developed a unique workaround for this ETF.
CHNA will invest primarily in Singapore exchange FTSE China A 50 index futures for its exposure. PowerShares believes that this approach provides a liquid and efficient alternative to direct investment in the China A-Shares market, and it reduces counterparty risk as well (also see Time to Buy This China ETF?).
The Singapore exchange launched this futures contract in 2010 in order to provide offshore investors with a way to directly access the China A-Shares market. CHNA now becomes the first ETF to utilize this approach, making it a novel ETF in a competitive corner of the market.
FTSE China A50 Index under the microscope
China A Shares are mainland Chinese companies that trade on Chinese exchanges. They can usually only be purchased by domestic Chinese investors, though with the QFII process, some foreigners have access as well.
The benchmark that underlies the futures contracts for CHNA consists of 50 of the largest of these A Shares companies by market cap that are listed on the Shanghai and Shenzen stock exchanges. For this benchmark, the portfolio is free-float adjusted, and liquidity screened, while it is reviewed on a quarterly basis.
In terms of holdings, financials dominate accounting for nearly two-thirds of the portfolio. Beyond that, industrials also occupy a double digit allocation, while consumer stocks also receive a good chunk of the assets too (read China ETFs Rise on Financial Sector Strength).
So, the index isn’t exactly the most diversified out there, the companies in the benchmark are unlikely to be found in other China products, suggesting it will offer up a different way to access the China market.
How does it fit in a portfolio?
This ETF might be a good choice for investors seeking a different type of China exposure that goes off the beaten path. Companies in this segment tend to be a bit smaller than what you see in large cap focused China funds, so they might be more representative of conditions on the ground in the nation (read China ETF Investing 101).
CHNA might not be a good choice if you are searching for a diversified basket of companies, as the fund looks to be heavily concentrated in financial stocks. Additionally, the somewhat circuitous exposure might not sit well with some investors (holding a security trading in Singapore of Chinese companies) so it is important to take this into consideration as well, as some might prefer more ‘direct’ access to the nation.
There are currently a number of China ETFs on the market, including the ultra popular iShares China Large Cap ETF (FXI), and the SPDR S&P China ETF (GXC). In addition to these, there are nearly two dozen other China ETFs suggesting that competition will be heavy for assets in this space.
However, it is worth noting that there is only one other ETF tracking the A-Shares market in China, the Market Vectors China A Share ETF (PEK). This fund charges investors 72 basis points a year in fees and has assets of roughly $35 million (See The Right and Wrong Ways to Invest in China ETFs).
The product tracks the CSI 300 Index for its A-Shares exposure, though it doesn’t directly invest in the benchmark, using derivative instruments that have economic characteristics substantially identical to those of China A-Shares stocks.
The current basket is tilted towards financials (39%), while industrials (13.1%), and consumer discretionary stocks take up the next two spots and both account for more than 11% of the basket each.
While the competition in the A-Shares market might be a little light compared to the overall China space, the asset accumulation so far in this corner of the market isn’t that encouraging. This is especially true because other exotic types of China exposure have seen decent inflows, suggesting that there might not be a whole lot of interest in this particular segment.
This could be due to the relatively unique way that investors must obtain the exposure, via either swaps (in the case of PEK) or futures . However, now that China is seemingly back on track and that emerging markets are rising once more, this new type of exposure could be of some interest to investors. So don’t write off CHNA just yet, especially considering that this fund is a bit cheaper than PEK, possibly allowing this fund to steal some share in this in focus corner of the China ETF market.
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