There are plenty of reasons to have a dedicated allocation to Chinese equities in most investment portfolios. China is likely to be the only major economy to record annual GDP growth in 2020. Its companies have benefited from the first-in-first-out dynamic concerning Covid-19 and have seen sharp earnings recovery. The government is continuing to pursue structural reforms and China, along with the rest of the region, is benefiting from multiple megatrends at the same time.
When it comes to the Chinese equities, there are several share classes that investors can choose from. A-shares are traded in local currency and listed on either Shanghai or Shenzhen exchange. B-shares and H-shares trade in foreign currency, while H-shares are also listed outside of mainland China.
Historically, the onshore Chinese market has been mostly off-limits to foreign investors. Before 2003, foreigners could only trade H-shares listed in Hong Kong. However, the government has been easing restrictions ever since, cancelling quotas for QFII and RQFII programmes earlier this year.
Access to the A-shares market is significant. Between the two onshore exchanges, the Shanghai Stock Exchange and the Shenzhen Stock Exchange, the total market cap of stocks listed represents the second-largest equity market in the world. In fact, A-shares account for 70% of the market capitalisation of all Chinese listed stocks and offer meaningful diversification benefits, primarily due to low proportion of institutional ownership.
The easiest way for investors to gain exposure to the Chinese A-shares market is through a China A-shares ETF. In this article, we explore three prominent China-focused ETFs and their distinct exposure profiles – one of which a pure China A Shares ETF.
iShares MSCI China ETF (MCHI)
The objective of the iShares MSCI China ETF is to track the performance of the MSCI China Index. As we discussed in our article on the MSCI indices, the MSCI China Index has a cap on the inclusion of A-shares, using a 20% inclusion factor. This results in a somewhat sector concentrated portfolio, heavily skewed towards Consumer Discretionary, Communication Services and Financials.
MCHI was launched in 2011 and as of September 30 had close to $6 billion in assets under management (AUM). Despite its more than 600 holdings, the portfolio is heavily exposed to just a few names. Alibaba and Tencent, for example, represent more than 34%. As of September 30, the price-to-earnings ratio for MCHI was 16.56, and it offered a dividend of 0.91%.
MCHI has done a good job tracking the performance of its benchmark index over the years. With the expense ratio of 0.59% per year, MCHI offers a somewhat concentrated exposure to the Chinese equity market, albeit with the A-shares allocation restricted by the 20% inclusion factor for the MSCI China Index.
Xtrackers Harvest CSI 300 China A-Shares Fund (ASHR)
The Xtrackers Harvest CSI 300 China A-Shares Fund was the first U.S.-listed ETF providing exposure to the onshore Chinese market. ASHR tracks the CSI 300 index, which includes 300 largest and most liquid A-shares listed on both, Shanghai and Shenzhen exchanges. Compared to the MSCI China Index, tracking the CSI 300 offers investors pure A-shares exposure, excluding any shares listed outside of the mainland markets.
As of mid-December, ASHR had roughly $2.4 billion in AUM. It provides diversified exposure to A-shares with top 10 holdings accounting for just over 25% of the portfolio as of September 30. At the sector level, Financial Services represent 28.4%, while five other sectors make up between 9% and 15% each. The underlying index price-to-earnings ratio was 15.29, and its dividend was 1.89%.
With the expense ratio of 0.65% per year, ASHR is a good option for investors looking to add pure A-shares exposure to their portfolio.
KraneShares CSI China Internet ETF (KWEB)
Lastly, we would like to introduce a particular ETF that does not offer exposure to the A-share market, but is very sector-specific. The KraneShares CSI China Internet ETF provides exposure to Chinese software and information technology stocks. KWEB tracks the CSI China Overseas Internet Index, which includes publicly traded Chinese companies in the Internet and Internet-related sectors, listed the United States and Hong Kong. Relative to the other two ETFs that mostly offer large-cap exposure, KWEB holds a number of small and mid-cap stocks, representing around 25% of the portfolio.
As of mid-December, KWEB had roughly $3.6 billion in AUM. Holdings just 36 stocks, KWEB is the most concentrated ETF from the three we covered here. Top 10 holdings make up close to 62% of the portfolio. With a total fee of 0.73%, KWEB is an interesting play for those investors looking for dedicated exposure to Chinese companies in the e-commerce and internet space.
Different flavours of Chinese equity exposure
While all funds have a compelling product, each will likely appeal to a different type of investor. The Xtrackers Harvest CSI 300 China A-Shares Fund offers pure exposure to the Chinese A-share market. The iShares MSCI China ETF tracks a much broader MSCI China Index, while the KraneShares CSI China Internet ETF is dedicated to offshore internet exposure.