6 ETFs To Play China’s Hot Stock Market

August 06, 2014

(For even more information on China ETFs, read our Definitive China ETF Guide)

China, the world's second-largest economy, is rebounding from a slowdown earlier in the year, making ETFs that give investors direct access to the mainland China securities, dubbed "A-shares," attractive investment options.

The Shanghai Composite Index rallied 7.5 percent rally last month, thanks to government reforms and gains in manufacturing industries. The CSI 300 Index, which is tracked by a pair of China-focused ETFs, gained 8.6 percent in July.

The catalyst for the surge in the Chinese market are reforms introduced by the government aimed at opening up its state-owned enterprises more to private investments. Mainland China securities are also expected to further benefit from a Hong Kong/Shanghai connect program implemented in October whereby foreign investors will have more access to China A-shares securities.

Uncorrelated Frontier

"I like A-shares because they're just less correlated with the global markets, so this massive pool of global liquidity can't necessarily tap that market freely," said Dennis Hudachek, a senior ETF analyst at ETF.com.

A-shares are equity securities issued by companies incorporated in mainland China and are denominated and traded in China's currency, the renminbi. The mainland market of securities that are listed in Shanghai and Shenzhen is considered to be the next great frontier of investing in China, superseding the first wave of Hong Kong-listed companies that have been accessible to Western investors for some time.

Investors looking to ride the upward momentum of the relatively untapped mainland Chinese equity market have plenty of options from issuers such as KraneShares and Deutsche Bank, which have lined the shelves with their own mainland China-focused funds.

But not all China A-share ETFs look, act and, perhaps more importantly, cost the same.

Van Eck Global's Market Vectors ChinaAMC A-Share ETF (PEK | F-46)
AUM: $26M; YTD returns: -0.59 percent

PEK, which formerly invested in Chinese securities via derivatives, earlier this year changed up its strategy to a more direct route to the Chinese market by owning actual stocks after the launch of db X-trackers Harvest CSI 300 China A-Shares (ASHR | D-51). Like ASHR, the fund also tracks the CSI 300 Index.

Previously, PEK, which launched in October 2010, was marketed as the first fund of its kind to offer broad exposure to China A-shares via derivative securities using Credit Suisse as a partner. The use of derivatives exposed investors to the inherent risks of any equity investment, plus so-called counterparty risks associated with use of over-the-counter derivatives.

However, PEK's quick pivot hasn't provided the fund with the returns and AUM traction it envisioned. The fund is cheaper than ASHR, coming in at 0.72 percent per year, or $72 for every $10,000 invested, but it has an average spread of 0.22 percent versus ASHR's 0.10 percent.



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