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ETF Investors May Have Largely Passed Over the China Swings


Chinese markets and A-shares related exchange traded funds experienced their best two-day gain since 2008, but retail investors may have passed over the gains, sitting out the recent volatility and break-neck swings.

Since the Wednesday close, the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) has jumped 25.9%. Additionally, the Market Vectors ChinaAMC SME-ChiNext ETF (NYSEArca: CNXT) and Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap Fund (ASHS) , which track more mid-sized Chinese A-shares, surged 51.9% and 42.2%, respectively.

The Chinese markets were bolstered by an unprecedented government intervention, including outright stock support, loosening margin trading requirements, banning large shareholders from selling positions for six months and allowing companies to suspend trading to stem the outflows.

However, investors remained reserved with their bets as many largely passed over the potential opportunity in Chinese equities, following the recent plunge. For instance, ASHR experienced $29.8 million in outflows this week while CNXT saw $1.8 million in outflows and ASHR lost $29.8 million, according to ETF.com.

Furthermore, the Direxion 2x Daily CSI 300 China A Share ETF (CHAU) , the first leveraged A-shares ETF to list in the U.S., saw $3.8 million in redemptions since Wednesday. Incredulous investors who believed the Chinese market was only experiencing a dead cat bounce also added $26.0 million to Direxion Daily CSI 300 China A Share Bear 1x Shares (NYSEArca: CHAD) .

“Given the recent volatility and heavy-handed response by the Chinese government, foreign investors may remain on the sidelines for the time being,” writes Morningstar analyst Patrcia Oey.

While China is the second largest economy in the world, many emerging market fund managers have not pulled the trigger on adding more Chinese onshore equities into their portfolios. Consequently, many retail investors remain largely underweight China and less exposed to the recent bout of volatility. Nevertheless, some investors have held some China exposure through Hong Kong-listed Chinese companies, but the H-shares stocks have not shown the same level of volatility as A-shares.

“Investors with a 60/40 stock/bond portfolio of broadly diversified index funds will have about a 5% allocation to emerging-markets stocks,” Oey added. “This means that Chinese stocks, on average, will account for about 1% of the entire portfolio. So while there have been plenty of headlines about the dramatic moves in the onshore Chinese equity markets, these events have had a minimal impact on the average investor’s portfolio.”

However, overseas China shares account for about 2.5% of global equities market-cap-weighted indices. Major indices, like MSCI, are thinking about adding more A-shares allocations, but the index providers remain wary of liquidity bottlenecks as foreign investors are restricted in their access to mainland Chinese stocks.

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.