Diversified Exposure to China with A-Shares ETF

ETF Trends

Chinese equities and exchange traded funds are garnering greater attention as the country shows improving economic data along with relatively low valuations. Investors interested in accessing China have many options on hand, including one that provides exposure to China’s restricted A-Shares market.

The Market Vectors China ETF (PEK) tracks the CSI 300 Index, which is a modified free-float, cap-weighted index of 300 companies listed on the Shenzhen Stock Exchange or the Shanghai Stock Exchange. The ETF employs a synthetic replication strategy to track the CSI 300 by purchasing index swaps. PEK has a 0.72% expense ratio. [‘Hot Money’ Chasing China ETF Rally]

Sector allocations include banks 21.9%, materials 12.1%, capital goods 11.6%, energy 7.6%, diversified financials 7.2%, food/beverage 6.8%, real estate 5.6%, insurance 5.1%, biotech 4.5% and consumer durables 3.0%. [China ETFs See Huge Demand Amid Rally]

Since mainland China-listed A-Shares that trade on in Shanghai and Shenzhen are not accessible to most foreign investors, people would typically gain exposure to Chinese equities through China index funds that invest in Chinese companies listed in Hong Kong or New York.

“Relative to a popular Chinese ETF such as SPDR S&P China (GXC) , which invests only in Hong Kong- and U.S.-listed Chinese stocks, PEK is better diversified – it is not as top-heavy, with a weighted average portfolio market cap of $11 billion, which is about a third the weighted average market cap of GXC’s portfolio,” writes Morningstar analyst Patricia Oey.

PEK is up 12.4% over the past year, compared to the 11.6% rise in GXC.

Since 2002, investors who wanted to purchase A-Shares would have to be granted a qualified foreign institutional investor license, or a QFII.China has also kept investment quotas low, so foreign investors only account for 1% to 2% of the local Chinese market.

“While the planned liberalization of the A-Share market may drive up correlations in the coming years, it will likely be a slow process,” Oey added. “As such, PEK should provide diversification benefits, especially for investors with insufficient exposure to emerging markets.”

However, China A-Shares can be more volatile than overseas counterparts due to its “closed” nature. Additionally, the A-Shares come with a premium to their H-Shares counterparts. PEK currently trades at a 5.24% discount, according to Morningstar.

For more information on China, visit our China category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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