Van Eck, the New York-based firm that has been a pioneer in the emerging markets ETF space, announced another industry first on Thursday. The company launched the Market Vectors China ETF (PEK), which will seek to replicate an index consisting of 300 A-Shares stocks listed on the Shenzen and Shanghai Stock Exchanges. The new fund will join 17 existing products in the China Equities ETFdb Category, but PEK will be the first to offer investors exposure to A-Shares.
A-Shares are stock of mainland-China companies that have historically been available only to Chinese citizens. Most international investors who have established exposure to Chinese equities have done so through B-shares (dollar-denominated versions of mainland stocks) or H-Shares, which trade in Hong Kong. In recent years, however, access to A-Shares has become more readily available; Foreign investors authorized as Qualified Foreign Institutional Investors (QFIIs) may now purchase A-Share securities, expanding the options for exposure to the world’s second largest economy [see The Definitive Guide To China ETFs].
Access to A-Shares significantly increases options for investors interested in Chinese equities. According to data from Van Eck, A-Shares account for 72% of China’s equity market and 24% of the total emerging market stock universe. That means that prior to the debut of PEK, the vast majority of Chinese equities were out of reach for most international investors. In addition to expanding the universe of investable assets, A-Share exposure may offer more of a “pure play” on China. Chinese companies listed on international exchanges, such as those in New York or London, tend to be more mature firms that maintain operations throughout the world. The A-Shares market, on the other hand, includes younger companies that derive revenue and earnings primarily from domestic Chinese consumers. Noteworthy A-Shares stocks include SAIC Motor (China’s largest auto company), China Pacific Insurance Group, and Baoshan Iron & Steel (China’s largest and most modernized iron and steel complex).
Many investors elect to achieve exposure to China through Hong Kong stocks, but there are some significant differences between these securities and A-Shares. Although Hong Kong is technically a special administrative region of the People’s Republic of China, the two economies are drastically different. Hong Kong is a highly autonomous developed market with its own currency (the Hong Kong dollar) and legal system. It is home to a relatively advanced capitalist service economy, with a heavy focus on financial services. Mainland China, on the other hand, remains an emerging market that is home to a rapidly-expanding consumer sector. Correlations between Mainland and Hong Kong listed stocks are generally in the neighborhood of 0.65, highlighting the independence of these two markets [see all the ETFs with China Exposure here].
Under The Hood
Even the firms approved as QFIIs to access A-Shares face ownership restrictions. An investment quota of about 1% of the A-Shares exchanges’ market cap is in place, a policy designed to regulate foreign investment. PEK won’t actually buy A-Shares, but rather invests in swaps and other derivatives in order to replicate the performance of the underlying index. Swap-based ETFs are relatively common in European markets, but the assets of most U.S.-listed ETFs are the actual securities that make up the related index.
The CSI 300 Index consists of stocks listed on the Shenzhen Stock Exchange and Shanghai Stock Exchange, accounting for approximately 65% of the total market capitalization of the two stock exchanges. From a sector perspective, the index makes the largest allocations to financials (34%), industrials (17%), and materials (15%). The consumer sector–including both staples and discretionaries–gets a weighting of about 15%, significantly higher than many of the most popular China ETFs [see Emerging Market ETFs: Where's The Consumer Exposure?].
PEK will charge an expense ratio of 0.72%, roughly in line with the average for the China Equities ETFdb Category (0.67%).
Disclosure: No positions at time of writing, photo is courtesy of Agnieszka Bojczuk.