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When It Comes to China Exposure, Your ETF Choice Matters

This article was originally published on ETFTrends.com.

Through exchange traded funds, investors are now able to diversify into China, the world's second-biggest economy and quickly growing emerging country, but there are a number of different ways to access this emerging Asian market.

“Mainland China A-shares have been robust verses Hong Kong H-shares showing significant outperformance," Luke Oliver, DWS Managing Director, Head of Index Investing, Americas, told ETF Trends.

Specifically, Oliver highlighted the outperformance of the Xtrackers Harvest CSI 300 China A ETF (ASHR), which advanced 26.8% year-to-date, compared to the  iShares China Large-Cap ETF (FXI) , the biggest China-specific ETF by assets under management, which increased 6.6% this year, and the S&P 500 Index, which gained 21.9% so far this year.

The disparate performances, even among broad China-themed ETFs, all comes down to their holdings, so it is important for would-be investors to do their due diligence and look under the hood, so to speak.

The differences between China-focused ETFs can be attributed to which share classes are included in their underlying indices. Chinese market's various share classes make it a complex system and it can be difficult to quickly identify the differences.

Chinese equities is a broad term that covers A-Shares, H-shares, B-shares, N-shares, Red Chips, and P-chips.

When it comes to China ETFs, most track either H-shares or A-Shares. A-shares make up the largest segment with over 3,500 listed equities and reflect mainland China’s developing equity market. Looking at their market capitalization, A-shares are almost 100 times the size of H-shares, which make up the second largest portion of China’s stock market.

However, A-shares are not represented in many major indices that U.S. investors are aware of since they were previously restricted to only mainland Chinese investors. The restrictions, though, have since been greatly reduced, allowing foreign ownership to increase.

The ongoing initiatives of Chinese authorities have helped improve global investor access to Chinese A-shares through reforms such as the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) initiatives.

Looking ahead, investors will have more investment options to choose from when considering China equities as the second round of its quality issues, China A Shares, is included in the FTSE Russell global equity indexes.

As major indexers incorporate China A Shares into widely observed benchmarks, asset managers may also follow suit and raise demand for mainland Chinese shares, or further strengthen price gains ahead.

For more information on the Chinese markets, visit our China category.

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