The Complete Guide To Chinese Share Classes

November 12, 2012

 

The iShares MSCI BRIC ETF (NYSEArca: BKF) is the largest BRIC ETF, and has 39 percent of the fund weighted in China. Again, since it tracks an MSCI index, investors won't find any N-shares here.

The Guggenheim BRIC ETF (NYSEArca: EEB) is an extreme case, as it's only eligible to hold depositary receipts and N-shares. EEB includes ADRs of H-shares, like China Mobile and CNOOC, but its 20 percent weighting in China excludes the "Big Four" Chinese banks—ICBC, Bank of China, Agricultural Bank of China and China Construction Bank—since none of these banks floats ADRs in the U.S.

This provides another example of how share class differences drive sector exposure in ways investors may not expect. Such sector differences in turn can lead to starkly different performance results.

Lastly, the SPDR BRIC 40 ETF (NYSEArca: BIK) is inclusive of all Chinese shares, and carries a massive 46 percent weighting in China. From a Chinese exposure perspective, BIK is the most comprehensive.

Note: For more information on other regional or global funds with significant China exposure, see the table at the end of the paper.

Choosing The Right Fund For You

While there are many different reasons beyond share classes for choosing the right China ETF, investors should fully understand that China funds come with an extra layer of required research.

At the end of the day, the returns in an ETF are driven by its holdings, and the companies and sectors held in China ETFs can differ significantly depending on the types of share classes an ETF is eligible to hold. Seeing the huge discrepancy in returns in PGJ compared with other China ETFs on the day EDU announced the SEC probe proved just how much share classes can affect a fund's returns.

Investors have options. For most investors looking for the broadest, total market exposure to China, funds that are eligible to hold all investable shares—such as GXC and YAO—make the most sense. For those looking for small-cap exposure, that would be HAO.

Still, some investors might want to minimize their exposure to companies listed using VIEs for the reasons mentioned above. If that's the case, then FXI, MCHI, FCHI or ECNS might be the better choices. (Note: Some companies listed in Hong Kong—including Tencent Holdings—use VIEs as well, even though companies listed in the U.S. usually get most of the negative attention.)

For those looking for sector-specific exposure, the good news is that all China sector ETFs, offered mostly by Global X Funds, include all investable shares in their funds.

Inevitably investing in China will go through changes in the coming years as China continues to open its financial markets to the rest of the world. We at IndexUniverse will continue to monitor these changes.

In the meantime, one of the keys to investing in China ETFs lies in knowing the differences between the various share classes, and which funds hold which type of shares. Once that hurdle is crossed and understood, your options should narrow and choosing the right China ETF for your investment needs should become easier.

 

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