New China ETFs Off To Hot Start

December 05, 2013

Two new China ETFs with a different approach have bright futures.

Although neither of KraneShares’ first two China ETFs has attracted any assets since their July launches, that may be about to change. And here’s why.

The KraneShares CSI China Internet ETF (KWEB) and the KraneShares CSI China Five Year Plan ETF (KFYP) are both up more than 17 percent over the past three months, besting the returns of all other Chinese ETFs. Although they have less than $10 million in combined assets, they may offer the exact type of supplemental Chinese exposure investors are searching for.

As my colleague Dennis Hudachek has pointed out numerous times, investing in China can be quite complicated. There are now 30 ETFs focusing on China, with six different Chinese share classes to choose from. So, picking the right ETF can be a dizzying proposition.

By now investors seem to have woken up to this reality. Whereas once upon a time investors plowed money into the iShares China Large-Cap ETF (FXI | B-53) as the de facto choice for Chinese equity exposure, there are now six different Chinese equity ETFs with more than $100 million in assets each.

Sure, FXI still reigns supreme—it has more than $6 billion in assets, after all—but investors have begun branching out in a major way.

It is with this in mind that I looked more closely at KFYP and KWEB—and my sense is that it’s only a matter of time before assets start pouring in. Neither fund purports to solve the problem of coverage or concentration that plagues FXI and some of its peers, but that shouldn’t matter.

There’s not a single China ETF that currently covers all Chinese share classes. Investors who want to build a comprehensive portfolio of Chinese shares classes need to mix and match products from a range of issuers.

Even aggressive portfolio allocations will give China somewhere in the neighborhood of a half a percentage point in  weighting—China accounts for just 18 percent of the iShares MSCI Emerging Markets ETF (EEM | B-100), which in turn makes up just 2.5 percent of an aggressive target allocation fund. So, taking the time and money to build a comprehensive China basket may be hard to justify.

That said, some investors may consider a broad emerging markets ETF like EEM or the Vanguard FTSE Emerging Markets ETF (VWO | B-85) as a viable core China holding, while also looking for some sort of satellite position to fine-tune their exposure to the world’s second-biggest economy.

And this is where KFYP and KWEB come in, as the two ETFs are focused on companies likely to benefit from the advancement of the economy.

Both funds were designed and built by a firm that leveraged the expertise of a “boots on the ground” index provider, China Securities Index Company (CSI), to craft custom indexes.


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