The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR) celebrated its first anniversary this week and did so in style. ASHR, the first U.S.-listed exchange traded fund to offer investors physical access to Chinese A-shares, is now a $467.4 million fund.
A-shares valuations have spent significant time this year residing below those of their Hong Kong counterparts and news of the Shanghai-Hong Kong Stock Connect program, aimed at increasing securities trading between Hong Kong and mainland China, has served as another attention-getter for ASHR and rival A-shares ETFs. [A-Shares ETFs in Focus Ahead of Stock Connect Launch]
Lost in the all focus on large-cap A-shares ETFs is the potency of those funds’ small-cap counterparts of which there are two: The Deutsche X-trackers Harvest CSI 500 China-A Shares Small Cap ETF (NYSEArca: ASHS) and the Market Vectors ChinaAMC SME-ChiNext ETF (NYSEArca: CNXT).
Both ETFs are new. ASHS debuted in May followed by CNXT in July. The rookie status shares by ASHS and CNXT has not stopped either ETF from delivering impressive returns. Since CNXT came to market, the fund is up nearly 15% while ASHS is higher by 22.5% since its rival debuted.
CNXT, the Market Vectors offering, tracks the SME-ChiNext 100 (SZ399611), which provides exposure to the 100 most liquid mid- and small-cap stocks that trade on the Small and Medium Enterprise (SME) Board and the ChiNext Board of the Shenzhen Stock Exchange (SZSE). The ETF actually allocates nearly three-quarters of its weight to mid-caps.
The SME Board is viewed as China’s NASDAQ and the comparison is apt and reflected well by CNXT, an ETF that devotes nearly 42% of its combined weight to the technology and consumer discretionary sectors. [Another A-Shares ETF Comes to Market]
ASHS tracks the CSI 500 Index of Shanghai- and Shenzhen-listed small-caps and the fund is more domestically focused with about 61% of its combined weight going to the industrial, materials and energy sectors.
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
