Many who believe they are following a diversified investment strategy are typically under-allocated to the global markets, especially China, the second largest economy in the world. Investors, though, can increase their China exposure with exchange traded funds, but people should look under the hood as no two China ETFs are the same.
“While China is the second-largest economy in the world, foreign investment in China is still relatively low,” Todd Rosenbluh, S&P Capital IQ Director of ETF Research, said in a research note.
As of the end of November, China only made up 2.5% of the MSCI All Country World Index. In comparison, the U.S. made up 53.5% of the benchmark index, followed by Japan 8.0%, U.K. 6.9%, France 3.4% and Switzerland 3.2%, according to MSCI.
According to Deutsche Asset & Wealth Management, non-Chinese investors only account for about 1.5% of the local Chinese equity market. In contrast, the percentage of foreign ownership in the U.S. is 14%, 23% for Japan, 24% for Taiwan and 51% for Germany, Dodd Kittsley, Head of ETF Strategy for Deutsche, told S&P Capital IQ.
The major reason for the low foreign ownership rate of mainland Chinese may be attributed to the strict controls Beijing has placed on outside investors – foreigners could only access mainland China A-shares via the Qualified Foreign Institutional Investor (QFII) or the Renminbi QFII (RQFII) programs.
However, China is undergoing reforms to open up its markets, as well as shifting away from state-owned enterprises and encouraging private capital to play a larger role, Kittsley added.
The Chinese A-shares market has experienced a large swing late summer, with the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR) down more than 40% during the height of the selling. ASHR tracks a basket of mainland stocks traded on the Shanghai and Shenzhen indices.
As the volatility dissipates, investors may be looking at China A-shares ETF options again.
“However, investors considering adding exposure to the
largest emerging market should be sure to look inside of the holdings,” Rosenbluth warned.
For instance, ASHR, the largest China A-shares-related ETF, tracks a group of large-cap Chinese companies, with a large 39.8% tilt toward financials, along with industrials 17.4%, consumer discretionary 11.0% and information technology 7.4%.
On the other hand, other popular plays, like the Market Vectors ChinaAMC SME-ChiNext ETF (NYSEArca: CNXT) and Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap Fund (NYSEArca: ASHS), lean toward more Chinese middle-capitalization companies that trade on the mainland.
Due to its smaller company tilt, ASHS only has a 9.1% exposure to financials but holds a greater position in industrials 23.3%, consumer discretionary 15.8% and technology 14.3%.
Additionally, CNXT has an even smaller 6.9% tilt toward financials, but a much higher weight in technology at 32.8%.
“We think the distinct exposures are notable as CNXT was up 40% year-to-date through December 9, ahead of 25% gain for ASHS and a 4.6% decline for ASHR,” Rosenbluth added.
For more information on China, visit our China category.
Max Chen contributed to this article.