China A-Shares In Spotlight, Returns Lag

June 22, 2017

MSCI’s decision to add China A-shares to its emerging market index is big news. It will expand access to China’s mainland stocks to a broader audience, and increase exposure to China in that index to nearly 40%.

As CNBC estimates, there are some $2 trillion of assets in index mutual funds and ETFs benchmarked against the MSCI Emerging Markets Index today. And analysts everywhere are forecasting billions of dollars in asset flows following the A-share inclusion. This is a big deal in the indexing world.

But the reality is that ETF investors have long had direct access to A-shares. Funds like the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) and the KraneShares Bosera MSCI China A Share ETF (KBA) have offered exposure to China’s mainland market since well before the MSCI move.

Both funds also have a relatively strong following. For single-country ETFs—which many still consider too niche or too narrow in focus to truly go mainstream—ASHR is already the fifth-largest China ETF today, with $371 million in assets, while KBA, at No. 7, has $157 million.

Surprising Performance Leaders

There’s another interesting point here. In 2017, with all eyes on the recovery in emerging markets, on the rush to capitalize on attractive valuations in that space, and on the much-awaited MSCI decision on A-shares after years of mulling it over, it’s funds that exclude A-shares that are leading in performance. 

Consider that two of the best-performing China ETFs year-to-date are the KraneShares CSI China Internet ETF (KWEB) and the WisdomTree China ex-State-Owned Enterprises Fund (CXSE). Both of these ETFs have delivered more than three times the returns of A-share ETFs this year. They are also significantly outperforming the largest China ETF, the $3.2 billion iShares China Large-Cap ETF (FXI)



Technology & Internet Shining

The chart above tell us that, in 2017, mainland China stocks and Hong-Kong-listed stocks have delivered pretty similar results—ASHR and KBA versus FXI.

It also tells us that, when it comes to sectors leading performance in the Chinese market this year, none has been stronger than technology and, in particular, the internet. KWEB, launched in 2013, is the only ETF to zoom into China’s internet segment.

With more than $525 million in total assets, the fund owns companies like Alibaba, Baidu and Tencent—some of the market’s leaders this year amid strong earnings growth, and the drivers of KWEB's outperformance relative to other funds.

KWEB, which invests in Hong-Kong-listed stocks and U.S.-listed companies, known as N-Shares, is in fact one of the 10 best-performing ETFs this year, period.


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