Chinese ETFs: All Things Considered

October 27, 2016

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by Linda Zhang, co-founder of Women In ETFs, and former head of research and portfolio manager at Boston-based Windhaven Investment Management. Read part 2 in this series: "China's ETF Industry: Short History With Rapid Growth." 

China has risen to the second-largest economy and the second-largest capital market after the U.S. for some time. How much can U.S.-based investors participate in the economic and capital market growth via China-related ETFs?

We set out to examine many aspects of the Chinese ETFs in the marketplace. How many Chinese ETFs do U.S. investors have access to in the U.S.? What kind of investment exposures do they provide? Who are the major players as issuers? What are the trends for fund flows this year? What is the state of fixed-income Chinese ETFs?

Key Players' Domination & Product Proliferation

There are currently 44 U.S.-listed ETFs tracking exclusively Chinese equities, with a total of close to $9 billion in AUM. BlackRock's iShares dominates the Chinese equity ETFs space, with the two largest products: the iShares China Large-Cap ETF (FXI), which tracks the FTSE China 50 index; and the iShares MSCI China ETF (MCHI), which tracks the MSCI China Index.

These two products count for a little over two-thirds of the asset category. SSGA's SPDR S&P China ETF (GXC) is a distant third, with over $800 million in AUM. Deutsche Bank came late to the game, however. It was among the first issuers to introduce the China local A-shares-based ETFs to U.S.-based investors. The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR), tracking the broad CSI 300 A Share Index, is on its way to break $500 million, making it the fourth-largest China only ETF.

Because of the operation and legal complexity, very few companies issue A-shares-based products. The majority of ETF products are tracking companies listed in Hong Kong (H shares), the U.S. (N shares) and other overseas markets, for ease of trading and settlements.

Dominance Of Top ETFs

Source: Bloomberg 10/11/2016

Although iShares and SSGA have dominated the Chinese ETF space, there is no lack of effort by other issuers to try and crack this market.

KraneShares is a firm that specializes only in China thematic ETFs. For example, it has met with success in an ETF tracking the Chinese internet companies listed overseas. The KraneShares CSI China Internet ETF (KWEB) is now becoming the fifth-largest Chinese equity ETF. Other notable players include Global X issuing its suite of Chinese sector ETFs, and Guggenheim issuing thematic ETFs. Direxion, PowerShares, VanEck Shares and Wisdom Tree have also entered the space.

It is worth noting that CSOP is the only Chinese asset manager that issues ETFs directly in the U.S. market. However, it has faced huge challenges in raising assets, partially due to lack of name recognition.

 

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