ETF Of The Week: China ETF ‘ASHR’ Bruised

July 12, 2018

It wasn't supposed to be this way.

In June, MSCI finally added China A-shares to its MSCI Emerging Markets Index. (China divides its shares into several "classes": A-shares are Chinese stocks denominated in renminbi and traded on local exchanges in Shanghai and Shenzhen.)

MSCI's inclusion of A-shares was supposed to help facilitate greater investment in China and in emerging markets as a whole, by offering investors greater access to the large, successful companies on the Chinese mainland.

Then Trump's trade war happened.

Last Friday, $34 billion worth of tariffs on Chinese goods went into effect, with China implementing their own tit-for-tat retaliatory tariffs shortly thereafter. This comes in addition to the blanket 25% steel and 10% aluminum import tariffs that went into effect earlier this year.

Then on Tuesday, Trump announced even more tariffs on more than 6,000 Chinese goods, together worth $200 billion. As expected, China's threatened more tariffs of its own.

All this has taken the steam out of the Shanghai Stock Market, which has dropped 14% year-to-date.

A-Shares ETFs Stumble
Predictably, China A-shares ETFs have plummeted, too, and it comes at a time when the role of A-share specific ETFs is questionable.

For years, A-shares ETFs were the only way investors could access these securities. Now, however, A-shares will appear in broad emerging markets benchmarks, making ETFs dedicated to the share class somewhat obsolete.

Though several ETFs hold China A-shares, two particular funds hold the lion's share of assets: The $586 million Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR) and the $405 million KraneShares Bosera MSCI China A Share ETF (KBA).

ASHR is the larger and older of the two; it also offers more vanilla exposure to A-shares than KBA. ASHR tracks 309 of the largest, most liquid Chinese companies, weighted by market capitalization. 


Source: StockCharts.com. Data as of July 12, 2018.

Complex Markets, Complex Structure

ASHR Chinese companies through its subadvisor, Harvest Global Investments, which maintains a special license to hold A-shares up to a certain quota.  Harvest can also access A-shares through a special program called "Stock Connect" which gives non-mainland investors access subject to a daily cap.
 
Should everyone want A-shares at the same time, ASHR could find itself unable to get new shares through Stock Connect, and hitting the limits of Horizon's ownership quota.  At that point, ASHR would need to use derivatives to maintain its exposure.

If neither is possible, ASHR may have to limit or halt creations. Halted creations are rare, but they can happen—and to be sure, any ETF investing directly in A-shares faces these same quotas and concerns.

Costs Matter
ASHR's expense ratio is 0.65%. That's a single basis point more expensive than KBA’s 0.64%. 

Though KBA has fewer assets and roughly half the average daily trading volume, it has dominated the bulk of yearly flows, pulling in $198 million compared to ASHR's $64 million.

Despite the potential issue with creations, ASHR possesses strong liquidity, with $34 million in average daily volume and an average spread of just 0.03%.

Under The Hood
The bulk of ASHR's portfolio is in financials (36%), with significant holdings in consumer cyclicals (13%) and industrials (12%) as well. Two of its top three companies are banks, while a third, Kweichow Moutai, is a food, beverage and packaging conglomerate.

Year-to-date, ASHR is down 15%, though on a one-month basis, the fund has fallen 11%. ASHR dropped 3% on the news of the latest round of tariffs, but has since recovered most of those losses.

 

Contact Lara Crigger at [email protected]

 

 

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