ETF Trends
ETF Trends

Emerging markets equities and exchange traded funds have come under pressure in recent weeks, but that does not alter one of this year’s more prominent themes within the asset class: The increasingly allure and potency of China’s A-shares, the stocks traded on the mainland markets of Shanghai and Shenzhen.

China’s A-shares were previously a hard-to-access asset class and some market participants would make the case accessing A-shares is still a task, but some exchange traded funds have helped ameliorate the situation. That is important given the heft of the A-shares market.

“China A-shares are too big to be ignored, yet remain difficult to access for many investors. How can global investors sidestep a stock market that has become the third-largest equity market globally, with a total market value of $3.9 trillion and an average daily volume of $29 billion,” said Qi Wang and Chin-Ping Chia in a new MSCI whitepaper.

There remain issues with A-shares access, even with U.S.-listed ETFs, although some of those funds have proven popular with investors. For example, last month Deutsche Asset & Wealth Management was forced to limit creations in the Deutsche X-trackers Harvest CSI 300 China A-Shares Fund (NYSEArca: ASHR) and the Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap Fund (NYSEArca: ASHS) amid heavy demand because the two ETFs were bumping up against their respective Renminbi Qualified Foreign Institutional Investor (RQFII), which allows the funds to purchase A-shares equities. [Limited Creations in Some A-Shares ETFs]

Late last week, “China accelerated RQFII quotas as the quarter progressed, adding $2.5 billion in September, according to State Administration of Foreign Exchange (SAFE) data released on Friday. The total outstanding quota is now $62.2 billion. Regulators gave the largest award of the month to the Hong Kong Monetary Authority, adding $1 billion to take its quota to $2.5 billion,” Reuters reported.

That helped stoke a rally in ASHS, which is just five months old, that has seen the ETF gain about 40% since coming market while being one of the third quarter’s top non-leveraged ETFs.

As evidenced by the proliferation of A-shares ETFs, including 2014 launches such as ASHS and the KraneShares Bosera MSCI China A-Shares ETF (NYSEArca: KBA), investors are looking to boost their exposure to stocks traded on mainland China as mainland Chinese stocks recently traded at a 10% discount to their Hong Kong-listed counterparts, though that discount has recently shifted to a premium. KBA is the only A-shares ETF in the U.S. that tracks an MSCI index. Other issues are also stoking investor interest in A-shares stocks.

“Rising correlations between developed market and emerging market equities in recent decades have diminished the diversification effect of emerging market investing,” notes MSCI. “ China A-shares – along with frontier markets – still offer relatively lower correlations with the rest of the world, lead to potential diversification effects at the total portfolio level.”

The Market Vectors ChinaAMC A-Share ETF (NYSEArca: PEK), the first U.S-listed ETF to offer access to China’s A-shares, has a three-year correlation to the S&P 500 of just 0.24, according to Market Vectors data.

Despite, the growing importance of China’s A-shares market, it has not been promoted to major emerging markets indices by index providers. Earlier this year, FTSE, MSCI and Standard & Poor’s all declined to elevate China A-shares to emerging markets status.

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