China ETF

[touzi]

Goh Eng Yeow wrote about buying China ETF in last week’s Sunday Times and somebody also mentioned buying the A50 ETF in this forum becoz China is a transformational story unfolding. I agree. I spend some time in the last week digging out some information on China ETF’s available in SGX and HKEX. This is a simple summary and I would love to hear your views.

Constituent Stocks
The largest mainland companies are the banks and they inevitably appeared among the constituent stocks of China ETF’s. If the Chinese banking sector blows up, the ETF will definitely be badly affected.

H-shares vs A-share ETF
For those unfamiliar, H-shares refer to stocks of mainland companies listed in HKEX. Most of them are also listed in the mainland stock exchanges, where they are known as A-shares. In general the A-shares are traded at a premium over H-shares (confession#1: I have not done an actual price comparison for the individual stocks, this is just what I read ). Moreover, the HKEX is definitely better regulated compared to the mainland exchanges.

Direct vs Synthetic
I am still not able to understand much about synthetic ETF, though the SGX website has a 3 page comparison. To me counterparty risk and derivatives sound risky. (confession#2: I have never bought any ETF before, so this is all new to me).

If I am not wrong, A-shares ETF are all synthetic as foreigners are not allowed to buy from the mainland exchanges. I would appreciate if someone can confirm or correct this.

All those China ETF listed on SGX are also synthetic.

Based on the little that I have found out so far, I am more interested in H-shares, direct ETF. Does that mean that I can only buy from HKEX ? The one that I am considering at the moment is the Hang Seng H-shares ETF which consists of 45 stocks. More information can found on the websites:
http://www.hkex.com.hk/eng/invest/compan...langcode=e
http://bank.hangseng.com/1/2/investment/...f/overview

A close equivalent of it will be SGX listed Lyxor ETF China Enterprise (HSCEI), but as I mentioned earlier, it is synthetic. Moreover it is traded in USD.

Next is to find out how to buy stocks from HKEX (confession#3: Other than my company shares, I have only bought from SGX so far in my life).

[D123]

You are right. Synthetic ETFs and Direct ETFs are almost the same, except that the synthetic ones bear greater counterparty risks. If the ETF manager goes bust, you might not get all your money back. Theoretically, if the Direct ETF manager goes bust, they should be able to distribute the shares of the underlying stocks in specie. So if I have the choice between Synthetic and Direct, I would definitely go for direct. However, not all indices are tracked by both Synthetics and Directs.

For exposure to the Chinese stock market, there are actually a few ETFs that have direct exposures. The Hang Seng H-Share Index ETF (ticker 2828) that you have mentioned is one. Others include:

Name of ETF: SPDR S&P China ETF
Index tracked: S&P China BMI Index
Ticker: GXC
Place of listing: NYSE

Name of ETF: iShares FTSE China 25 Index Fund
Index tracked: FTSE China 25 Index
Ticker: FXI
Place of listing: NYSE

Name of ETF: ChinaAMC CSI 300 Index ETF
Index tracked: CSI 300 Index
Ticker: 83188
Place of listing: HKSE

Name of ETF: E Fund CSI 100 A-Share ETF
Index tracked: CSI 100 Index
Ticker: 83100
Place of listing: HKSE

Name of ETF: CSOP FTSE China A50 ETF
Index tracked: FTSE China A50 Index
Ticker: 82822
Place of listing: HKSE

Name of ETF: Harvest MSCI China A Index ETF
Index tracked: MSCI China A Index
Ticker: 83118, 3118 (dual currency)
Place of listing: HKSE

These funds are able to buy the underlying shares that are listed on the Shanghai Stock Exchange because they are licensed under the qualified institutional investor program. The HKSE-listed ones are new and they are under a quota, which means that the value of their purchases is limited to a certain amount. My interpretation of this is that there may be tracking error between the ETF and the actual index that it tracks; which in turn means that there is the possibility that the ETF trades more like a closed-end fund rather than a traditional open-end index ETF, and prices may at times be at a premium over book.

There is a whole range of pros and cons for each vehicle, and in your analysis, you should include the assessment of:

(a) Index tracked (tracking error, weights of individual counters and industries etc.)
For example, if you like Chinese financials, you would consider the SSE 50 Index and FTSE China A50 Index since both are about 60% weighted in financials, and you would avoid the CSI 300 index since it only has a weight of about 40% in Chinese financials.

(b) ETF manager (track record, financial stability, fees etc.)
For example, I think the SPDR S&P China ETF has one of the lowest fees, even though we're being picky here since they all have relatively low fees.

Here are a few links for further reading:
http://www.hkex.com.hk/eng/global/faq/RQFII.htm
http://www.cumber.com/commentary.aspx?file=120111b.asp

Hope this helps.

[cyclone]

To add another direct one :

Name of ETF: Value China ETF
Index tracked: FTSE Value-Stocks China Index
Ticker: 3046 HK
Place of listing: HKSE

Value China ETF (the "Fund") is an index-tracking fund listed on the Stock Exchange of Hong Kong Limited ("SEHK") which aims to provide investment results that closely correspond to the performance of the FTSE Value-Stocks China Index (the "Index"). The Index captures the performance of 25 value stocks amongst liquid and tradeable Chinese
companies listed on the SEHK, including H-shares, red chips and other SEHK listed Chinese companies. Index constituents must pass a value screening process designed by VPISL which includes valuation, quality, and contrarian screening factors. To ensure the highest level of tradability, a set of liquidity and investability screens are applied during the index construction process. The Index is a free float-adjusted market capitalisation-weighted index.

Industry exposure (as at 15-03-2013)
Sector - Weighting
Others - 0%
Financials - 77%
Basic Materials - 12%
Industrials - 7%
Consumer Goods - 3%

[touzi]

Name of ETF: SPDR S&P China ETF
Index tracked: S&P China BMI Index
Ticker: GXC
Place of listing: NYSE

Name of ETF: iShares FTSE China 25 Index Fund
Index tracked: FTSE China 25 Index
Ticker: FXI
Place of listing: NYSE

Name of ETF: ChinaAMC CSI 300 Index ETF
Index tracked: CSI 300 Index
Ticker: 83188
Place of listing: HKSE

Name of ETF: E Fund CSI 100 A-Share ETF
Index tracked: CSI 100 Index
Ticker: 83100
Place of listing: HKSE

Name of ETF: CSOP FTSE China A50 ETF
Index tracked: FTSE China A50 Index
Ticker: 82822
Place of listing: HKSE

Name of ETF: Harvest MSCI China A Index ETF
Index tracked: MSCI China A Index
Ticker: 83118, 3118 (dual currency)
Place of listing: HKSE

I believe all these are A-share index?

For example, if you like Chinese financials, you would consider the SSE 50 Index and FTSE China A50 Index since both are about 60% weighted in financials, and you would avoid the CSI 300 index since it only has a weight of about 40% in Chinese financials.

Actually I want to avoid over exposure to the mainland financials.

(b) ETF manager (track record, financial stability, fees etc.)

Is the rating by morningstar generally reliable?

Hope this helps.

Yes, thank you very much.

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To add another direct one :

Name of ETF: Value China ETF
Index tracked: MSCI China A Index
Ticker: 3046 HK
Place of listing: HKSE

Value China ETF (the "Fund") is an index-tracking fund listed on the Stock Exchange of Hong Kong Limited ("SEHK") which aims to provide investment results that closely correspond to the performance of the FTSE Value-Stocks China Index (the "Index"). The Index captures the performance of 25 value stocks amongst liquid and tradeable Chinese
companies listed on the SEHK, including H-shares, red chips and other SEHK listed Chinese companies.

Thanks, but I am a little confused. If it is tracking the MCSI China A Index ( that means A-share right? ), how come it mentioned companies listed on SEHK?

This has only 25 stocks compared to HS H-share which has 45 stocks. However Morningstar has a 5 star rating on this ETF, whereas the HS H-share Index ETF only has a 3 star rating.

[pianist]

what is the merit of buying into china etf?

[D123]

Apart from the S&P SPDR China ETF, all the others are investing in A-shares. The S&P one tries to include all China-domiciled companies, even if they are listed elsewhere. This means that those listed in the US, HK and maybe even SG are in play.

I do not know anything about Morningstar ratings as I do not use them, but you can conduct cursory checks on the ETF managers by looking at their parent companies. For example, for S&P, look at S&P/McGraw Hill, for iShares, look at BlackRock etc. It is also useful to see the performance of their other ETFs. S&P has a long track record, as does iShares. The Chinese ETF managers are harder to analyze since I do not think they are public entities. But I know for example that ChinaAMC is indirectly partially owned by the Chinese government.

Investing in A-shares directly rather than H-shares can be beneficial because you get a broader exposure to the Chinese stock market. The ChinaAMC ETF for example gives you access to 300 companies listed in Shanghai.

[cyclone]

To add another direct one :

Name of ETF: Value China ETF
Index tracked: MSCI China A Index
Ticker: 3046 HK
Place of listing: HKSE

Value China ETF (the "Fund") is an index-tracking fund listed on the Stock Exchange of Hong Kong Limited ("SEHK") which aims to provide investment results that closely correspond to the performance of the FTSE Value-Stocks China Index (the "Index"). The Index captures the performance of 25 value stocks amongst liquid and tradeable Chinese
companies listed on the SEHK, including H-shares, red chips and other SEHK listed Chinese companies.

Thanks, but I am a little confused. If it is tracking the MCSI China A Index ( that means A-share right? ), how come it mentioned companies listed on SEHK?

This has only 25 stocks compared to HS H-share which has 45 stocks. However Morningstar has a 5 star rating on this ETF, whereas the HS H-share Index ETF only has a 3 star rating.

Sorry, I made a mistake. It should track FTSE Value-Stocks China Index.
Index tracked: FTSE Value-Stocks China Index

[touzi]

what is the merit of buying into china etf?

Since I do not know much about the mainland Chinese companies, I figure that buying the ETF is safer than buying individual stock.

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Anybody knows what is the impact on the ETF if the index that it is tracking changes its component stocks? For example, if out of 40 stocks, they change 2 of them after a review, what will the ETF manager do? Thanks !

[d.o.g.]

Anybody knows what is the impact on the ETF if the index that it is tracking changes its component stocks? For example, if out of 40 stocks, they change 2 of them after a review, what will the ETF manager do? Thanks !

An index-tracking ETF must own the same securities in the same proportion as the underlying index. So when the composition (name and weighting) of securities in the index changes, the ETF manager must change the composition in the fund accordingly.

Note that ETF managers differ in their approach. Most use a mechanical approach, where they will attempt to change the exposure on the actual day the index changes. This is simple but stupid, because traders will front-run them by buying up the stocks that will be included or have higher weighting and short-selling the stocks to be removed or reduced in weighting.

Because of this front-running, some ETF managers will rebalance ahead of time in order to join in and hopefully earn some extra returns. How far ahead? This is where the "art" of investment management comes in. Too early, and your out-of-index exposure could subtract value instead of adding it. Too late, and your investors will get scalped by traders.

Of course, since ETF managers are not paid for performance, it is much easier to just do a "dumb" rebalancing on the day itself, and let your investors suffer.

[csl123]

The companies in China are notorious for cooking their books.

Even investment in equities through ETF should be done with caution.

what is the merit of buying into china etf?

Since I do not know much about the mainland Chinese companies, I figure that buying the ETF is safer than buying individual stock.

---

Anybody knows what is the impact on the ETF if the index that it is tracking changes its component stocks? For example, if out of 40 stocks, they change 2 of them after a review, what will the ETF manager do? Thanks !