New China A-Shares ETF Lets Investors Access Mainland


The New York Stock Exchange welcomed a new ETF that offers U.S. investors access to mainland Chinese stocks typically exclusive to mainland citizens.

Db X-trackers Harvest CSI 300 China A-Shares Fund (ASHR), launched with $108 million in assets by Deutsche Asset & Wealth Management, holds 300 of the largest and most widely traded companies listed on the Shanghai and Shenzhen stock exchanges, denominated in renminbi, or yuan.

The fund most heavily weights financials at nearly 40% of assets, industrials 14%, consumer discretionary 13%, consumer staples 12% and materials 7%.

It will compete with numerous China ETFs in the stock market , includingPowerShares China A-Shares Portfolio ( CHNA ), launched Oct. 10; andMorgan Stanley China A Share Fund ( CAF ), a closed-end fund with $491 million in assets.

KraneShares, an ETF provider specializing in Chinese stocks, is developing a China A-shares ETF that's set to list on the NYSE soon.

Van Eck Global announced Wednesday it's in talks to get exposure to this asset class for itsMarket Vectors China ( PEK ). The ETF with $34 million in assets currently provides exposure to China A-shares via sophisticated products whose performance is tied to them.

The MSCI China A Index tumbled 3% year to date measured in yuan, while returning 5% the past year, as of Nov. 4. It fell an average annual 12% the past three years, but rose an average 9% the past five years and 8% the past 10 years.

When measured in U.S. dollars, the index lost less than 1% year to date, while gaining 7.5% the past year. It lost an average annual 9% the past three years while returning an average annual 11% in the past five and 10 years.

FXI's Performance

IShares China Large-Cap ( FXI ), the largest China ETF by assets, has fallen 4% this year, underperformingiShares MSCI Emerging Markets ( EEM ), which fell 2%. FXI shed an average annual 5% the past three years vs. the benchmark 2% decline.

Despite boasting the world's fastest economic growth of nearly 8% annually between 1989 and 2013, China's stock market hasn't recovered its 2007 peak. FXI would have to double to reach its pre-financial crisis high.

Chinese stocks are trading at an ultralow price-earnings ratio of 7 and a price-to-book value of less than 1, Jeff Vollmer, founder of Hyde Park Wealth Management in Cincinnati, wrote in a client missive Tuesday. By contrast, the S&P 500 trades at 16 times earnings and more than two times book value.

"The Shanghai composite's price-to-book ratio is half of its November 2010 level. Its price-to-earnings multiple is 42%," Vollmer wrote. "Investors were overly optimistic until 2008. They're now overly pessimistic. Most importantly, they are usually wrong."

"While Chinese gross domestic product growth has slowed from the dramatic double-digit gains of a few years before, the nation's growth trajectory remains dramatically higher than all Western counterparts," he added. "Before long, the Chinese stock market will respond to the nation's systemic reforms, not to mention the current economic recovery."

In a fourth-quarter strategy report, Russell Investments recommended buying China because of its low valuations and strong growth outlook.

"China's economic indicators have bottomed and stronger export growth is expected as demand from the developed economies picks up," Russell wrote. "This suggests to us that low double-digit earnings growth is possible across emerging markets in 2014."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , ETFs

Referenced Stocks: CAF , CHNA , EEM , FXI , PEK

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