As more investors become aware of the differences in Chinese equity exposure, WisdomTree has announced that China A-shares will be added to two of its ex-state-owned emerging market exchange traded funds.
The WisdomTree China ex-State-Owned Enterprises Fund (NYSEArca: CXSE) and the WisdomTree Emerging Markets ex-State-Owned Enterprises Fund (NYSEArca: XSOE) will include China A-shares exposure to help investors capitalize on opportunities resulting form China’s economic shift toward domestic consumption and services.
“Over the past year, WisdomTree has been evaluating the opportunity to add China A shares to our proprietary indexes,” Jeremy Schwartz, WisdomTree Director of Research, said in a note. “Given the continued openness of the Chinese domestic stock market to foreign investors, we are operationally ready to implement this change. The addition of China A shares to these indexes will provide investors with a more complete, diversified exposure.”
Specifically, the underlying indices tracked by CXSE and XSOE will include the 50 largest companies by float adjusted market capitalization that meet index requirements. The resulting A shares exposure will be capped at 25% for CXSE and 5% for XSOE.
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.
Related: ETF Strategies to Help Position for the Rest of the Year
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.