China ETFs: Mixed Sentiment & Performance

Late last summer, Jim Rogers said he was buying Chinese equity ETFs on dips—his comments made shortly after the Chinese market faced a steep correction amid concerns about slowing growth. By and large, it’s difficult to find a market pundit who is truly negative on China long term, but ETF investors seem to have more mixed feelings.

Rogers’ rationale was simple: China’s long-term growth story wasn’t about to be derailed on account of stock market corrections.

“China's certainly going to have problems,” Rogers said at the time. “Everybody who rises—whether it's an individual or a family or a company or a country—has problems along the way. So my approach to China is, if and when there are problems or hysteria or panic in the markets, I try to buy.”

The country’s blockbuster GDP growth years may be behind it—that 11%-a-year growth rate of the early 2000s is now looking more like 6-7% a year going forward—but Beijing policies have shown a commitment to turning China into a financial force worldwide, or so many say.

Investor Sentiment Stabilizes

Still, on the ground, headlines about China’s ups and downs seem to have quieted in recent months.

Everyday investors—once panicked late last summer as Chinese stocks plummeted—now seem less eager to bail, but still seem to have mixed feelings about the world’s second-largest economy.

Asset flows into some of the largest China equity ETFs in the past year are all over the place—some pretty negative, some pretty good. Year-to-date, even as these funds underperform, asset flows remain mixed.

The recovery emerging market ETFs—and some country-specific funds—that we have seen so far in 2016 have yet to reach China equity ETFs. Many are in the red this year. A look at the five-largest China ETFs in the market today shows that, year-to-date, they are all down by two digits, with A-shares down the most:

The decline has been met with net redemptions on the top three funds. The $3.6 billion iShares China Large-Cap Fund (FXI | B-42) has now bled $1.2 billion in assets year-to-date. The $1.8 billion iShares MSCI China ETF (MCHI | B-24) has lost $36 million. The $657 million SPDR S&P China ETF (GXC | B-32) has seen net redemptions of $125 million since the beginning of the year.

For perspective, consider that FXI started 2015 on a tear, surging more than 21% in the first quarter on growing expectations that the Chinese government would embark on fiscal easing. At that time, FXI boasted more than $6 billion in assets, making it the largest and most popular China ETF in the market.

FXI’s focus on China’s large-cap segment has always been popular, and today, the fund remains at the No. 1 spot in the segment. But its asset base is little more than half what it was a year ago.

MCHI and GXC, too, have struggled to attract investor dollars as of late. They have been net-asset losers year-to-date.

A-Shares Different Perspective

The $360 million Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR | D-65) tells a different story. The fund rallied dramatically early in 2015, and its correction was far steeper than the one seen in FXI and H-share funds in general. So far this year, ASHR is leading in losses, bleeding more than 18%.

But longer term—as the two-year-chart below shows—the fund remains in the black, and by a wide margin relative to H-share-focused FXI.

Charts courtesy of StockCharts.com

What’s more, ASHR has actually been a net asset gainer year-to-date, raking in nearly $70 million in fresh net assets despite its weak performance so far in 2016. The fund invests exclusively in A-shares, or mainland-listed shares.

The Internet Darling

And then there’s the KraneShares CSI China Internet ETF (KWEB | B-30)—the fifth-largest China equity in the market today, with some $177 million in assets.

The fund was among the best-performing ETFs of 2015, with gains of 19%—a year when FXI and ASHR were down 13% and 2%, respectively.

Year-to-date, KWEB is also down. But investors are still buying it. The fund has seen net inflows of almost $18 million year-to-date—or about 10% of its total AUM.

The challenge investors increasingly face when it comes to China is figuring out what view to take on a country that’s often the center of debate, and one known for its opaqueness when it comes to policies, and with less-than-ideal communication skills.

Adding to the challenge is that there’s a growing number of ETFs with which to express those views. There are more than 40 different China equity ETFs in the market today.

As Tyler Mordy of Forstrong wrote recently on ETF.com: “Getting China ‘right’ is increasingly crucial.” That’s because the country’s role in the world economy keeps growing, and so does its impact on investment portfolios. Different views on China abound, and volatility is plenty—all of which have added “a new dimension of risk” to the China factor, according to Mordy.

The headlines on China may have quieted, but the challenge of figuring out what to do when it comes to investing in China continues unabated. For now, ETF investors may be showing—with their dollars—that sentiment on the world’s second-largest economy is mixed.

Contact Cinthia Murphy at [email protected].