A-Shares ETFs Face Wariness On China

May 12, 2014

Will the buzz spill over to actual dollars flowing into new China-focused ETFs?

China, the world’s second-largest economy, is experiencing an economic slowdown that has stoked interest in investors who view valuations in Chinese equities favorable relative to other emerging markets as well as developed markets.

ETF issuers, looking to capitalize on China’s long-term growth story, have launched China-focused ETFs to invest in mainland China securities. But some investors say the jury is still out on these new products, including the db X-trackers Harvest CSI 300 China A-Shares Fund (ASHR | D-49), the KraneShares Bosera MSCI China A Share ETF (KBA) and the db X-trackers Harvest MSCI All China Equity ETF (CN).

“China has performed relatively poorly, but based on where their valuations are and their future growth prospects, there is long-term value to be had there,” said David Dziekanski, portfolio manager at Toroso Investments, a New York-based ETF strategist.

“The Chinese real estate sector has been beaten down pretty significantly, but you’re talking about a price-to-earnings ratio of 6.66 right now,” he added. “And that’s really attractive compared to other emerging markets and the global economy.”

James McDonald, chief investment officer at Houston-based Index Strategy Advisors, noted that most of the liquid, nonmainland China-focused ETFs, including the $742.5 million SPDR S&P China ETF (GXC | B-41), the $4.7 billion iShares FTSE China 25 ETF (FXI | B-52) and the $850 million iShares MSCI China ETF (MCHI | B-41), have all been “losers” this year.

There is one exception, but it’s a leveraged and inverse play that rebalances daily—in other words, not for your everyday investor. It’s the $101 million Proshares Ultrashort FTSE China 25 ETF (FXP).

Year-to-date, GXC, FXI and MCHI are down between 10 and 11 percent, whereas FXP is up 16 percent. “So as you can see, the only way in to make money in China in a popular ETF in 2014 has been to short China,” said McDonald.


Chart courtesy of StockCharts.com


From Intrigue To An Empty Mine

As noted, ETFs focused on large and mostly untapped mainland China equity markets appear to be all the rage right now. This market of stocks listed in Shanghai and Shenzhen has long been coveted by issuers as an avenue to give investors access to the full complement of Chinese equity markets.

For now, the early returns on new ETFs like ASHR are less than stellar.



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