KBA, Best China A-Share ETF For Now

March 11, 2014

The CSI 300 Is Not Enough

As China’s economy and equity market evolve and grow, so will the MSCI China A Index.

After all, the China Securities Regulatory Commission indicated plans to restart the IPO pipeline for the domestic market.

The problem with the CSI 300 Index is that because it only has 300 stocks, it will certainly miss out on most of the growth and evolution of the Chinese equity market.

The index, which may at one time have been a solid representation of the A-shares market, will lose those qualities as the China A-share market grows and evolves and becomes something of a legacy view of the past.

But the MSCI China A Index will evolve with the market; adding more companies and maintaining the capitalization representation at about 85 percent will ensure exposure to the midcap space and some small-cap firms. To be sure, you can argue an evolving 85 percent might not be a complete representation of the A-shares market, but it sure is better than a hard-and-fast 300.

The bottom line is this: If you want broad-market exposure to the China A-share market but are also wary of small-cap volatility, I believe that KraneShares’ KBA is the best China A-share index ETF available on the market to-date. It offers the best neutral representation of the large- and midcap China A-share market.

Afterthought: While KBA may be the best China A-shares ETF currently available, it’s not perfect.

I’m looking forward to the day when a comprehensive China ETF exists that includes all share classes—not just A-shares—using noncapitalization indexing methodologies, such as fundamental weighting. That would help steer U.S. investors toward those Chinese firms that are dynamic and truly competitive, instead of firms born out of some legacy corporate welfare program sponsored by the central government in the world’s second-largest economy.

At the time this article was written, the author held a long position in ASHR. Contact Howard Lee at [email protected].

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