China A-Shares In Spotlight, Returns Lag

June 22, 2017

All About Consumers

What KWEB and CXSE have in common beyond significant exposure to technology—about 36% of CXSE is in tech names—is a focus on China’s consumer story. But what’s unique about CXSE is that it’s the only fund that goes about tapping into that story by excluding state-owned companies. The fund defines a state-owned company as any in which the government owns a stake bigger than 20%.

“People invest in China to tap into consumer-centric growth, particularly the middle class,” said Gaurav Sinha, asset allocation strategist at WisdomTree. “One of the best ways to access consumption is to eliminate state-owned companies. They are less efficient, and not as good to shareholders.”

That exclusion translates into different sector tilts. Consider that the competing iShares MSCI China ETF (MCHI) has similar allocation to technology, but a bigger allocation to financials than CXSE, and a much smaller allocation to consumer sectors. CXSE has three times the weighting to consumer discretionary as MCHI.

CXSE also has no allocation to energy and telecom, which are dominated by state-owned companies. These two sectors represent more than 12% of MCHI’s sector weightings.

Performance Driver

It’s that consumer focus that’s driving CXSE’s outperformance, Sinha says. He estimates that about 70% of the MSCI All China Index is tied to state-owned companies. A similar stat applies to FTSE’s view of China. 

“These indices promise you beta to Chinese growth, but they are giving you beta to Chinese government, and not many people invest in China for that,” Sinha said. “Our outperformance is a result of our consumer focus.”

To be clear, MCHI also excludes A-shares for now, but the fund is tied to the MSCI China Index. The fund’s underperformance relative to CXSE, as seen in the chart below, illustrates what sector tilts and exposure to state-owned names have meant this year.  


Charts courtesy of


In the end, MSCI’s decision to add A-shares to its benchmarks is being viewed as a huge positive for investors, and a nod to China’s efforts to open its capital markets to foreign investment.

But investing in China can take many forms, with ETFs offering all sorts of access that taps into various share types, sectors and companies. For a complete list of China ETFs, check out our China ETF Channel

Contact Cinthia Murphy at [email protected]


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