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A Stock They Don’t own Helps Explain the Rallies in These China ETFs


The top 10 non-leveraged international exchange traded funds on a year-to-date basis are all China funds and within that group, A-shares ETFs shine bright.

In a testament to the strength of A-shares ETFs, funds offering exposure to Chinese stocks trading in Shanghai and Shenzhen, the Market Vectors ChinaAMC SME-ChiNext ETF (CNXT) and the Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap Fund (ASHS) are up 128% and 117.4%, respectively, this year. Both of those gains are better than double that of the KraneShares Bosera MSCI China A ETF (KBA) , this year’s third-best non-leveraged ETF with a gain of 53%. [China ETF’s Moment in the Limelight]

CNXT and ASHS hold 101 and 516 stocks, respectively, but it is a stock that neither ETF holds that illustrates investors’ enthusiasm for and the risks surrounding China’s epic equity market rally.

In just 55 days since going public, Beijing Baofeng Technology, the maker of online video players, has surged over 4,200%, delivering in less than two months returns it took Apple (AAPL) 11 years to post, according to Bloomberg.

To some market observers, Shenzhen is China’s equivalent of the Nasdaq, a comparison that when examining CNXT seems appropriate. CNXT tracks the SME-ChiNext 100 (SZ399611), which provides exposure to the 100 most liquid mid- and small-cap stocks that trade on the Small and Medium Enterprise (SME) Board and the ChiNext Board of the Shenzhen Stock Exchange (SZSE).

The SME Board is viewed as China’s NASDAQ, leading to CNXT’s heavy tech exposure. [Meet 2015’s Best ETF]
CNXT allocates 50.6% of its combined weight to technology and consumer discretionary stocks. ASHS is no slouch either when it comes to exposure to those two sectors, devoting 28.5% to those two groups. The iShares China Large-Cap ETF (FXI) is the largest China-related ETF that tracks Chinese companies listed on the Hong Kong stock exchange, has a technology weight of just 10.5%.

As Bloomberg notes, a contributing factor to the run-up in mainland technology and Internet names has been the decision by many of those firms to list in their home country, eschewing the New York listings previously coveted by the likes of Alibaba (BABA) and Baidu (BIDU), among other Chinese Internet luminaries.

“Internet companies on Chinese exchanges now trade at a median 89 times estimated 12-month earnings, versus 25 times for global peers,” according to data compiled by Bloomberg.

That a time when the broader A-shares market is trading at its highest premium to Hong Kong in six years.

“Even more telling about the degree to which the A-share market is overheated may be the Hang Seng China AH Premium Index, which tracks the relative prices of 59 stocks that have both A- and H-share classes available.

Theoretically there should be little difference since institutional investors can arbitrage between the two markets, but in reality practical constraints have A-shares now trading at a 40% premium versus their H-Share counterparts, the largest since mid-2009,” according to AltaVista Research.

Frothy valuations are not preventing investors from piling into ASHS and CNXT. The two ETFs have a combined $212.5 million in assets of which over $82 million has come in this year.

Market Vectors ChinaAMC SME-ChiNext ETF