Investing In The 'New China' With ETFs

August 15, 2014

According to this correlation matrix, the CSI 300 Index has a correlation of only 0.099 to the S&P 500, and a correlation of 0.532 to the S&P China BMI Index (which has a 0.529 correlation to the S&P 500).

Currently, A-shares are also trading at a steep discount to H-shares, according to the Hang Seng China AH Premium Index. The last time I checked, the index was at 93.22 (100 indicates parity), indicating a steep A-share discount.

AH Premium

Source: Bloomberg

Yet the Hong Kong-Shanghai Connect program, slated to begin in mid-October, might lead to arbitraging activity, making premiums/discounts between the markets a thing of the past.

A-Share ETF Offerings

For A-share enthusiasts, currently the largest and most liquid RQFII ETF is the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR | D-51), which launched with much fanfare last November with more than $100 million in seed capital.

ASHR tracks the popular CSI 300 Index, China’s equivalent of our S&P 500 Index. For 82 basis points, or $82 for every $10,000 invested, ASHR tracks 300 of the largest and most liquid companies traded on the Shanghai and Shenzhen exchanges.

The fund now has more than $310 million in assets and trades close to $4.5 million at 9 basis point spreads. (ASHR’s original quota of RMB 2 billion looks like it was recently increased to RMB 2.85 billion ($462 million), suggesting flexibility in its ability to raise its quota—a great sign.

A smaller, less liquid fund providing a similar take on A-shares is the KraneShares Bosera MSCI China A-Share ETF (KBA). It’s wider in scope than ASHR, holding 441 large- and midcap stocks. The $3.3 million fund currently trades only $30K a day, at 14 basis point spreads.

My colleague Howard Lee wrote a piece on KBA not too long ago. While KBA’s off to a slow start, I wouldn’t rule it out if and when the A-share market gets hot again, which could bring liquidity and assets to the fund.


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