ETF providers have traditionally provided China market exposure to U.S. investors by incorporating Hong Kong-listed Chinese company stocks or U.S.-listed Chinese company stocks in underlying indices. However, this is quickly changing, with major benchmark providers like MSCI and FTSE including China A-shares into their primarily international indices.
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By excluding state-owned companies, the ETF strategies have outperformed, with CXSE up 50% and XSOE up 32% year-to-date. The CXSE and XSOE could provide exposure to a more targeted group of emerging market equities by excluding state-owned companies. By including China A-shares, the inclusion could help the ETFs further capitalize on China’s ongoing shift away from an export oriented economic model toward a more domestic focus.
“Rather than overexposing investors to energy and state-run banking sectors which are dominated by state-owned enterprises, CXSE is significantly allocated toward consumer discretionary and technology sectors,” Schwartz said. “The strong performance of CXSE and XSOE, which has a broader strategy, has been driven by this exposure to growth-oriented and consumer-centric companies. We believe the addition of China A shares will further enhance these strategies by allowing for access to new securities as well as a more complete exposure to the market.”
For more information on the developing markets, visit our emerging market category.