5 Top Performing China ETFs

China has had a tumultuous year. “Black Monday” on 24 August marked the culmination of concerns over an economic slowdown, as Chinese shares tumbled and sent global stock markets reeling.

A slowdown of factory and construction activity dragged down the country’s gross domestic product growth in the third quarter to 6.9 per cent, its lowest level since 2009.

Eyeing Up Opportunity

But in spite of recent volatility, it is still nonetheless one of the fastest growing countries. Investors are keenly eyeing opportunities in the world’s second largest economy as it increasingly opens up its borders to overseas money.

Of particular interest is the potential future inclusion of China’s mainland A-shares, which were on the brink of entering the MSCI emerging markets index earlier this year.

For international investors, who until recently have had limited access to domestic Chinese markets, the advent of ETFs tracking A-shares indices provides a low-cost and efficient way to gain access to renminbi-denominated equity markets.

Peter Sleep, a portfolio manager at Seven Investment Management, said that the more concentrated the index, the greater emphasis on Chinese state-owned enterprises, especially banks, which many investors would prefer to avoid.

“Many investors prefer to have a greater emphasis on smaller, faster growing, more entrepreneurial companies that are more representative of what is going on in mainland China,” he said. “When and how index investors invest in China will be one of the biggest investment decisions they make this decade. Once the A share market is included in the big indexes we know that China will be nearly 50 percent of the emerging market indexes.”

Top 5 Funds

The db X-trackers Harvest CSI300 Index UCITS ETF (ticker: RQFI) has been the best performing over the 12 months to 6 November, returning 54.89 percent. The ETF, which launched in January 2014, physically replicates the CSI300 index, which is broad and contains stocks listed on the Shanghai and Shenzhen exchanges.

“With ongoing charges 0.65 percent, this is one of the lowest cost Chinese ETFs available,” said Adam Laird, passive investment manager at Hargreaves Lansdown.

The second-best performer over the period was the Lyxor Fortune MSCI China A UCITS ETF (CNAL), returning 52.79 percent.

Laird said: “Lyxor’s fund tracks the broad MSCI China A Index. As the index covers almost 600 stocks, this ETF gives a more complete picture for the Chinese market than other Chinese ETFs”. The fund’s ongoing charge amounts to 0.85 percent.

The Lyxor UCITS ETF CSI 300 A-SHARE C-USD (CSIL) delivered 52.47 percent over the 12-month period. It tracks a 50-stock index, which Sleep at 7IM said is “slightly less liquid, but has a liquid future in Shanghai”. He notes that the fund has a hefty portion exposed to financials, at 38 percent of the index.

Sleep said: “The ETF is swap-based and is priced to reflect that at 40 basispoints.”

The CSOP Source FTSE China A50 UCITS ETF (CHNP) follows suit, returning 51.78 percent. The fund tracks a 50-stock index, and has a Singapore-listed future behind it, Sleep added. The ETF, however, is more expensive at 99 basispoints.

The fifth top-performer is the ETFS-E Fund MSCI China A GO UCITS ETF (CASE), delivering 51.08 percent. The underlying index has nearly 600 large and mid-cap stocks in Shanghai and Shenzhen.

“The smaller equities in this index will be relatively illiquid and slightly tougher to trade, so bid offer spreads could be higher and tracking error could be greater,” Sleep said. The fund, which has about 32 percent exposure to financials, costs 88 basispoints.

“Liquidity in China’s case is a double-edged sword,” Sleep said. “In the recent sell-off the most liquid stocks turned out to be the most volatile and did relatively poorly. This may have been because investors rushed for the exits in June through to August and sold their most liquid holdings.”