Domestic Chinese stock market has been on its best bull run since 2007. For US investors there are limited options wanting to invest in the Chinese equity market due to capital inflow restrictions. With the number of China ETFs option available it is important to note not all China ETF funds are created equal.
ETF providers have been developed a number of China focused ETF for investors looking to gain exposure to Chinese markets that invests in Chinese stocks listed on the Hong Kong Stock Exchange (for indirect exposure to Chinese growth, Mining and Base Metal ETFs is a good proxy for economic growth and and further segmentation of Chinese consumer exposure can be created through gaming ETFs).
We have provided a detailed review on 4 largest major China ETF each with a different approach investing in the Chinese stocks. It is important for investors to understand the critical differences between the China ETFs so the best option can be selected based on individual circumstances. We have highlighted the major ones below.
An important note for these ETFs are that they are valued in US dollars. This means that ultimate return is also a function of the Chinese yuan. These ETFs are based on the liquid chinese companies listed in China and Hong Kong.
Harvest CSI 300 China A-Shares ETF (SHR) – China Mainland Index ETF
Traditionally investors can only gain exposure to Chinese shares through Hong Kong listed Chinese stocks (H-Shares) or ADR of Chinese listed companies. However the market has opened up recently. Harvest CSI 300 China A-Shares ETF (SHR) is an China mainland index fund.
SHR tracks the performance of the A-Shares CSI 300 China Index. This is the index for investors that are looking for a fund that reflect the companies listed in Shanghai and Shenzhen. This market has been extremely volatile.
Those that want to take a bearish view on the market can use Direxion Daily CSI 300 China A Share Bear 1x Shares (CHAD).
iShares FTSE China 25 Index Fund (FXI) – Chinese companies listed in Hong Kong
The iShares FTSE China 25 Index Fund (FXI) tracks the FTSE China 25 Index. FXI is one of the largest ETF measured by asset under management for investors to gain exposure to Chinese companies listed in Hong Kong. FXI has total assets over $6 billion and it is primarily a large cap China ETF.
If the investors knowledge of the Chinese markets is limited, at first glance this would be the simplest and easiest ETF for investors to ride on the backs of strong economic growth in China. But by digging into the details of the ETF holdings exposes a number of issues investors should note.
FXI Fund Holdings and Sector Exposure
The top 10 holdings are Chinese mainland companies listed in Hong Kong or followed the ADR route to US listing. Total holdings of the top 5 positions adds up to almost 35% of the assets in the fund.
From sectoral perspective FXI holdings leans towards financial services, where 50% of the allocation is towards banks like China Construction Bank or Bank of China and other financial institutions. This means for dollar allocated to FXI half of it is invested in Chinese financials. Given certain leverage and risks in the Chinese financial and show banking systems investors should note the heavy reliance of FXI on financials sector to drive the ETF performance.
FXI ETF tracks the FTSE 25 China Index, only large market capitalization companies are included in this index. Hence revenue and earnings growth would be lower double digits and high single digits. Investors should not hope major future returns that would be multiple of Chinese economic growth.
iShares MSCI China Index Fund (MCHI)
iShares MSCI China Index Fund (MCHI) is the another large China ETF Fund listed in the US with total assets under management just shy of $1 Billion and average daily volume of half a million shares.
Key Points of MCHI
– It tracks the MSCI China Index.
– Total assets of the top 10 positions adds up to almost 50% of MCHI.
– It can be considered most diversified than FXI with 140 positions in the ETF.
Comparing MCHI with FXI, total exposure to financial services is relatively lower at 30% of total assets. The technology sector led by Tencent is the largest fund holding offsetting reliance on the finance and communication services sectors.
From market capitalization point of view, nearly 65% of all funds are classified as giant or mega cap and remaining portion invested in large and medium cap Chinese shares. It is interesting that none of the funds hold small capitalization Chinese stocks, which avoided a lot of the accounting frauds listed earlier on the NASDAQ and NYSE that could not face up to investor scrutiny.
SPDR S&P China ETF (GXC)
SPDR S&P China ETF (GXC) is the most diversified out all 4 largest China ETF Funds. It tracks the S&P China BMI index. Total assets and liquidity matches MCHI and the 10 holdings are very similar to MCHI and FXI. However the overall position weightings are spread out more evenly across major sectors. Top holdings comprise only 41% of total fund assets with ETF AUM spread across over 260 different companies.
Financial service consist is the largest industry exposure with 25%+ of the fund and technology the second largest at almost 20%. It has larger exposure to industrials relative to FXI and MCHI.
Short China ETF
Investors with a bearish view on the China market can use these inverse ETFs.
Direxion Daily FTSE China Bear 3x Shares (YING) tracks 3x the inverse movement of the FTSE China 50 Index. These are the 50 largest Chinese listed companies that are traded in Hong Kong.
Direxion Daily CSI 300 China A Share Bear 1x Shares (CHAD) is an inverse ETF of the CSI 300. Unlike YING, it is not a leverage inverse ETF. It is a 1 to 1 inverse return of the index.