Even before the Nov. 17 debut of the Shanghai-Hong Kong Stock Connect, U.S.-listed exchange traded funds tracking China’s A-shares, the stocks listed in Shanghai and Shenzhen, had been catching investors’ eyes.
For the week ended Nov. 20, the Deutsche X-trackers Harvest CSI 300 China A-Shares Fund (NYSEArca: ASHR), the first U.S.-listed ETF to offer physical exposure to A-shares stocks, added $67.2 million in new assets. Year-to-date, ASHR has added nearly $288 million of its $543.5 million in assets under management, but the ride has not always been smooth.
U.S. investors’ thirst for A-shares ETFs has been so strong that on two separate occasions over the past 70 days, Deutsche Asset & Wealth Management has been forced to announce limited creations for ASHR and the Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap Fund (NYSEArca: ASHS) because that heavy demand forcing the two ETFs to bump up against their respective Renminbi Qualified Foreign Institutional Investor (RQFII), which allows the funds to purchase A-shares equities. [Rush to A-Shares ETFs]
The second creation limitation on ASHR and ASHS goes into effect today, meaning only one creation unit of 50,000 shares per day will be allowed for each ETF.
“Foreign investors are allowed to trade only a small percentage of the daily total Shanghai stock market value, and as each firm is granted a particular quota, Deutsche is close to exceeding its $549 million limit. This limitation creates a supply constraint; investors eager to get into the Chinese market can find themselves paying more for the ETF than its underlying holdings are worth,” reports Chris Dieterich for Barron’s.
The result of limited creations is that an ETF can end up trading at wide premiums to its net asset value. For example, ASHR closed at $28.61 last Friday after touching a record high of $28.78 earlier in the session, but that was 5.3% of its NAV, the largest spread in the ETF’s history, according to Barron’s.
Although foreign investors’ access to A-shares has improved, due in part to the increasing number of ETFs on the market, China’s quota scheme is seen as hampering the inclusion of A-shares stocks in major emerging markets indices.
In a note out last week, FTSE Group, the index provider to over 100 ETFs trading in the U.S., pointed out that while the debut of stock connect went smoothly, once foreign investors hit their allotted quote of $2.1 billion, they lost access to more shares just before 2pm local time. FTSE and rival index providers, such as MSCI (NYSE: MSCI), have highlighted China’s quota system as one reason for not elevating A-shares to emerging markets status. [Stock Connect not Enough for A-Shares EM Promotion]
For its part, Deutsche Asset & Wealth Management is working to get its RQFII quota raised and its worth noting the issuer has previously been successful on that front. After creations in ASHR and ASHS were limited in September, it took about a month before those limits were lifted.
Deutsche X-trackers Harvest CSI 300 China A-Shares ETF