Investors have utilized exchange traded funds to gain exposure to Chinese equities through a roundabout way, but with recent offerings that track China A-shares, traders gain direct access to China’s markets.
Most China ETFs track Chinese stocks traded on Hong Kong Exchange, or H-shares, and listings on the New York Stock Exchange. However, since foreign investors are the major holders of these assets, H-shares movements will reflect overseas sentiment, writes Christopher Aldous, managing director of Charles Stanley Pan Asset, for Every Investor.
“When markets are weak overseas buyers are likely to dump more esoteric holdings or those which expose them to currency or other risks not present in their home market,” Aldous said.
Consequently, a fund like the iShares China Large-Cap ETF (NYSEArca: FXI), which tracks the FTSE China 25 Index, has underperformed Shanghai markets. FXI has dropped 10.4% year-to-date, compared to the 2.7% dip in the Shanghai Shenzhen CSI 300 Index.
However, ETF investors can now directly access the Chinese A-shares market, and more offerings are on the way. China A-shares track company stocks listed on the Shanghai or Shenzhen exchanges. A-shares ETFs have risen to prominence in recent months with the November 2013 debut of the db X-trackers Harvest CSI 300 China A-Shares Fund (NYSEArca: ASHR). ASHR is down 6.1% year-to-date.
In early January, Van Eck, parent company of Market Vectors, entered an agreement with China Asset Management, China’s largest mutual fund manager by assets under management, that allowed for the Market Vectors ChinaAMC A-Share ETF (NYSEArca: PEK) to join ASHR as the only two U.S.-listed ETFs that hold A-shares equities, not a basket of derivatives. PEK is down 8.9% year-to-date. [Market Vectors China ETF Makes A-Shares Leap]
Additionally, Source, a Europe-based asset manager and provided of exchange traded funds, and Hong Kong-based CSOP Asset Management have filed plans with the Securities and Exchange Commission to possibly list a China A-shares ETF in the U.S. [Source, CSOP Eye China A-Shares ETF]
Investors should be aware that the Chinese tax authorities can apply restroactive withholding taxes on dividends and capital gains, Aldous warned. However, providers will hold back a portion of dividend and capital gains on the ETF in case of a tax on a later date.
For more information on China, visit our China category.