Both ETFs help solve the problem of heavy allocations to Chinese state-owned enterprises. ASHS’ underlying index devotes 55% of its weight to firms that are not SOEs while that number jumps to 80% for the SME-ChiNext 100.
As is the case with U.S. small-caps, investors can expect valuation premiums with the A-shares equivalents. CNXT’s price-to-book ratio of 4.05 is inline with that of the Russell 2000 while ASHS trades at discount with a price-to-book ratio of 2.76.
What investors are paying up is as important as knowing that they are paying up in the first place. With small-caps, that means growth and A-shares small-caps deliver that. SMEs in China currently contribute 50% of national tax revenue, 60% of GDP, 74% of technical innovation, and 80% of employment, according to Market Vectors data.
“Instead of investing in big caps that provide low risk and close to none return because of the abundant supply explained above, retail investors are ignoring risk and switch their focus to small cap companies, which often tell wonderful growth stories to the public. The distorted Chinese market structure was illustrated by the abnormal 80% gain in the Chinese Second Board market, comprising of small cap stocks that are not qualified to list on the main board, while the main board was down 9% in 2013,” according to LCC Investment Research.
Deutsche X-trackers Harvest CSI 500 China-A Shares Small Cap ETF
