Surprising Drivers of the A-Shares ETF Surge

It is not a secret that exchange traded funds holding Chinese equities, both A-shares trading on the mainland and Hong Kong-listed H-shares, have recently been delivering staggering returns.

Over the past month, the top 13 non-leveraged ETFs are all China funds, according to ETFScreen.com. That group includes 4 A-shares ETFs, an impressive number considering there are just seven such funds trading in the U.S. Year-to-date, seven of the top 11 non-leveraged ETFs are China funds, four of which hold A-shares.

The big drivers of large-cap A-shares ETFs, including the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR), KraneShares Bosera MSCI China A ETF (NYSEArca: KBA) and the Market Vectors ChinaAMC A-Share ETF (NYSEArca: PEK), may come as a surprise to some investors: State-run companies. [Active Managers Could Add to China Rally]

Prior to this year, state-run enterprises throughout the developing world were heavily criticized for, in some instances, corruption, and, in many instances, disappointing returns. Some ETF issuers seized on that criticism and introduced new products excluding state-controlled firms. [New ETF Skirts State-Run Firms]

Things change and recently, Beijing-controlled companies have been driving the Shanghai Composite higher, creating a divergence between that benchmark index and the Shenzhen Stock Exchange Composite Index.

“The explanation for this divergence revolves around State Owned Enterprises,” said Rareview Macro founder Neil Azous in a note out Monday. “The Shanghai Index is composed of ~68% SOE and ~32% non-SOE whereas the Shenzen Index is only 22% SOE and 78% non-SOE.”

Granted, it is just a small data set, but over the past week the SOE-heavy ASHR and PEK have performed in-line with the Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap Fund (NYSEArca: ASHS) as each have raced to all-time highs.