7 ETFs To Play China’s Hot Stock Market

August 11, 2014

This article first appeared on our sister site in the U.S., ETF.com, and has been edited for European investors.

China, the world’s second-largest economy, is rebounding from a slowdown earlier in the year, making ETFs that give investors direct access to the mainland China securities, dubbed “A-shares,” attractive investment options.

The Shanghai Composite Index rallied 7.5 percent rally last month, thanks to government reforms and gains in manufacturing industries. The CSI 300 Index, which is tracked by a pair of China-focused ETFs, gained 8.6 percent in July.

The catalyst for the surge in the Chinese market are reforms introduced by the government aimed at opening up its state-owned enterprises more to private investments. Mainland China securities are also expected to further benefit from a Hong Kong/Shanghai connect programme implemented in October whereby foreign investors will have more access to China A-shares securities.

Uncorrelated Frontier

“I like A-shares because they’re just less correlated with the global markets, so this massive pool of global liquidity can’t necessarily tap that market freely,” said Dennis Hudachek, a senior ETF analyst at ETF.com.

A-shares are equity securities issued by companies incorporated in mainland China and are denominated and traded in China’s currency, the renminbi. The mainland market of securities that are listed in Shanghai and Shenzhen is considered to be the next great frontier of investing in China, superseding the first wave of Hong Kong-listed companies that have been accessible to Western investors for some time.

Investors looking to ride the upward momentum of the relatively untapped mainland Chinese equity market have plenty of options from the likes of db X-trackers, ETF Securities and Source, which have lined the shelves with their own mainland China-focused funds.

But not all China A-share ETFs look, act and, perhaps more importantly, cost the same.

1) Lyxor CSI A-Share 300 UCITS ETF (CSIA): €50.4 million AUM; year to date returns: -0.13 percent

The Lyxor CSI A-Share 300 fund tracks a market cap weighted index of the 300 largest and most liquid mainland Chinese stocks traded on the Shanghai and Shenzhen stock exchanges. The underlying index weights almost 40 percent in financials, with Ping An Insurance Group and China Merchants Bank the top two holdings.

This ETF’s monthly trading value has mostly been below £10 (€12.5) million, apart from a huge spike between December and February this year when trading hit over £30 million in one month.

It costs 0.40 percent, which amounts to paying €40 for every €10,000 invested. It trades in US dollars and is synthetically replicated.

2) ComStage FTSE China A50 UCITS ETF (CO24): AUM €35.5 million; YTD +0.59 percent returns

This ETF is another fund which uses derivatives to enable investors to gain access to the A-shares market, and has a relatively cheap price tag of 0.40 percent.

It tracks the FTSE A50 index, which comprises the 50 largest and most liquid companies on the mainland exchanges. This index has similar top holdings to the CSI 300 index but has a much higher weighting of over 60 percent in financials.

This fund is one of the newer entrants to the market as it launched in September last year; as a result it has a smaller amount of assets under management. Investors should also watch out for a wider bid offer spread and wider tracking difference of 2.15 percent.

3) db x-trackers Harvest CSI300 UCITS ETF (RQFI): AUM: €339.2 million; 3 month returns: +13.77 percent

RQFI, which launched in January, was the second European-listed China ETF capable of physically accessing the coveted China A-shares market. It tracks the CSI 300 Index, offering exposure to the 300 largest and most liquid Chinese shares traded on the Shanghai and Shenzhen exchanges.

Db X-trackers’ subadvisor, Harvest Global Investments, has a renminbi qualified foreign institutional investor (RQFII) licence up to a specific quota, meaning that if the quota is reached, the fund must get its quota for A-shares increased by the Chinese government, use derivatives to maintain exposure, or possibly even halt creations, so monitoring is warranted.

The fund’s 1.10 percent expense ratio is higher than average for the segment, which might drag on its tracking. Still, the fund launched with quite a bit of fanfare and millions in seed capital, suggesting large institutional backing.

4) The synthetic version of this ETF (XCHA) costs 0.50 percent per year, and is up 2.79 percent year to date.

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