Although investors saw some uncertainty in the Chinese market to
start the year, the country has turned it around recently. Stronger
data and more optimism over some of the nation's key trading
partners (specifically in Europe) has led to a boom in Chinese
shares as of late.
Thanks to this, we are finally starting to see some inflows for the
China ETF market, and even some new products targeting the nation
as well. This trend first started with some
new KraneShares products
, and it has now moved over to PowerShares and their new China
A-Shares Portfolio (CHNA).
New China ETF in Focus
This ETF, which will charge investors 50 basis points a year in
fees, looks to offer up a fresh way of targeting the often
forgotten China A-Shares market. A-Shares are generally hard to tap
into since they require Qualified Foreign Institutional Investors,
but PowerShares has developed a unique workaround for this ETF.
CHNA will invest primarily in Singapore exchange FTSE China A 50
index futures for its exposure. PowerShares believes that this
approach provides a liquid and efficient alternative to direct
investment in the China A-Shares market, and it reduces
counterparty risk as well (also see
Time to Buy This China ETF?
The Singapore exchange launched this futures contract in 2010 in
order to provide offshore investors with a way to directly access
the China A-Shares market. CHNA now becomes the first ETF to
utilize this approach, making it a novel ETF in a competitive
corner of the market.
FTSE China A50 Index under the microscope
China A Shares are mainland Chinese companies that trade on Chinese
exchanges. They can usually only be purchased by domestic Chinese
investors, though with the QFII process, some foreigners have
access as well.
The benchmark that underlies the futures contracts for CHNA
consists of 50 of the largest of these A Shares companies by market
cap that are listed on the Shanghai and Shenzen stock exchanges.
For this benchmark, the portfolio is free-float adjusted, and
liquidity screened, while it is reviewed on a quarterly basis.
In terms of holdings,
accounting for nearly two-thirds of the portfolio. Beyond that,
industrials also occupy a double digit allocation, while consumer
stocks also receive a good chunk of the assets too (read
China ETFs Rise on Financial Sector Strength
So, the index isn't exactly the most diversified out there, the
companies in the benchmark are unlikely to be found in other China
products, suggesting it will offer up a different way to access the
How does it fit in a portfolio?
This ETF might be a good choice for investors seeking a different
type of China exposure that goes off the beaten path.
Companies in this segment tend to be a bit smaller than what you
see in large cap focused China funds, so they might be more
representative of conditions on the ground in the nation (read
China ETF Investing 101
CHNA might not be a good choice if you are searching for a
diversified basket of companies, as the fund looks to be heavily
concentrated in financial stocks. Additionally, the somewhat
circuitous exposure might not sit well with some investors (holding
a security trading in Singapore of Chinese companies) so it is
important to take this into consideration as well, as some might
prefer more 'direct' access to the nation.
There are currently a number of China ETFs on the market, including
the ultra popular iShares
China Large Cap ETF (
, and the
SPDR S&P China ETF (
. In addition to these, there are nearly two dozen other China ETFs
suggesting that competition will be heavy for assets in this space.
However, it is worth noting that there is only one other ETF
tracking the A-Shares market in China, the
Market Vectors China A Share ETF (
. This fund charges investors 72 basis points a year in fees and
has assets of roughly $35 million (See
The Right and Wrong Ways to Invest in China
The product tracks the CSI 300 Index for its A-Shares exposure,
though it doesn't directly invest in the benchmark, using
derivative instruments that have economic characteristics
substantially identical to those of China A-Shares stocks.
The current basket is tilted towards financials (39%), while
industrials (13.1%), and consumer discretionary stocks take up the
next two spots and both account for more than 11% of the basket
While the competition in the A-Shares market might be a little
light compared to the overall China space, the asset accumulation
so far in this corner of the market isn't that encouraging. This is
especially true because other exotic types of China exposure have
seen decent inflows, suggesting that there might not be a whole lot
of interest in this particular segment.
This could be due to the relatively unique way that investors must
obtain the exposure, via either swaps (in the case of PEK) or
futures (CHNA). However, now that China is seemingly back on track
and that emerging markets are rising once more, this new type of
exposure could be of some interest to investors. So don't write off
CHNA just yet, especially considering that this fund is a bit
cheaper than PEK, possibly allowing this fund to steal some share
in this in focus corner of the China ETF market.
Want the latest recommendations from Zacks Investment Research?
Today, you can download
7 Best Stocks for the Next 30 Days
Click to get this free report >>
ISHARS-CHINA LC (FXI): ETF Research Reports
SPDR-SP CHINA (GXC): ETF Research Reports
MKT VEC-CHINA (PEK): ETF Research Reports
To read this article on Zacks.com click here.
Want the latest recommendations from Zacks
Investment Research? Today, you can download 7 Best Stocks for the
Next 30 Days. Click to get this free report