3 Reasons Why ETFs May Not Mirror China's Domestic Markets | ETF Trends

Chinese stock markets are flying high, but there seems to be a disparity between Chinese stocks and related exchange traded funds (ETFs).

Recent bullish rallies have China’s stock markets up around 22% this year, yet the average year-to-date loss is less than 1% for U.S. investors, remarks Mark Jewell for The News Tribune. The reason for the lower returns for average U.S. investor is due in part to the fact that an investor would holds funds that include stocks traded in Hong Kong or other exchanges and general pessimism is still lodged into the minds of people outside of China.

Jewell provides us with three reasons why an investment in a China fund may not perfectly match that of China’s domestic market:

  1. Access. The Chinese government is still controlled by a communist party that is able to limit foreign access to China’s domestic market.
  2. Sentiments. The recent Chinese stimulus plans have boosted domestic confidence. But the difference in thinking is shown when comparing some domestic exchanges that value a company up to 40% higher than foreign investors.
  3. Maturity. Speculation is still prevalent in China’s “still-maturing” market, which may suggest stock prices could vacillate on foreign exchanges. A Chinese investor usually puts a small amount of money into their markets and a small pool of money usually has more volatility.

It is noted that those intrigued by overseas investing should consider each country’s unique situations, and the higher risk involved in emerging markets.

  • iShares FTSE/Xinhua China 25 Index (FXI): down 4.5% year-to-date

ETF GXC performance

  • SPDR S&P China (GXC): down 2.7% year-to-date

ETF GXC performance

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.