Investing In The 'New China' With ETFs

August 15, 2014

Turning to the A-shares market, Van Eck recently brought us something new and innovative with its Market Vectors ChinaAMC SME-ChiNext ETF (CNXT). For 68 basis points, this new “RQFII ETF” selects 100 of the largest companies that list on Shenzhen’s SME and ChiNext boards.

As the name suggests, the SME and ChiNext boards cater to smaller companies, many of which are high-tech companies. China’s markets are obviously very different from the U.S., so it’s difficult making direct comparisons, but this index reminds me of the Nasdaq in the mid-1990s, when many tech startups were listing.

As expected, CNXT has a 23 percent weighting in IT, with another 26 percent in consumers and 10 percent in health care (financials are a measly 3.7 percent).

Innovation On The Horizon

Looking out on the horizon, there are a number of sector-specific RQFII ETFs on my radar, including a pair of consumer funds and a health care fund from Deutsche X-trackers.

I’m not the biggest fan of large-cap China ETFs, but I wouldn’t be surprised to see the Source CSOP FTSE China A50 ETF, currently in filing, launch with significant institutional backing, because it’ll track the most liquid A-share index in the world. I view this ETF as an “A-share” version of FXI.

Still, I think the true innovation will be seen in the fixed-income space. There’s now a slew of RQFII ETFs in the pipeline targeting China’s mainland fixed-income market, which offers plump yields.

I’m paying particularly close attention to three ETF issuers in the RQFII space: Deutsche X-trackers, Market Vectors and KraneShares.

In fact, they all have broad China bond ETFs in filing, and KraneShares even has a pair of China commercial paper ETFs in filing.

No Easy Choice

If China can pull off a soft landing as it works through its current debt woes, and sentiment does become positive, innovative issuers who are first to market are likely to reap big rewards.

For now, China remains a tale of two markets—onshore and offshore, and China’s state-capitalist structure and complicated equity markets don’t fit the mold of many index methodologies.

While the Deutsche X-trackers Harvest MSCI All China Equity ETF (CN) finally offers an “all China” approach around share classes, China’s grand plans to orchestrate a major shift in its growth model from exports to consumption also makes it difficult to capture these themes in one ETF wrapper.

Therefore, serious China investors just might have to continue tapping multiple ETFs for the foreseeable future.

At the time this article was written, the author held long positions in ASHR and CHIQ. Contact Dennis Hudachek at [email protected], or follow him on Twitter @Dennis_Hudachek.


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