iShares Planning New China ETF

by on January 17, 2011 | ETFs Mentioned:

Although many investors are growing increasingly wary of investing in China thanks to ongoing fears over high inflation and a possible rate hike, the nation remains the most popular destination for investors seeking emerging market exposure. Currently, the China Equities ETFdb Category has 18 securities in total with over $12.7 billion in aggregate AUM, meaning that ETF investors have put more money in China funds than pretty much all of Europe. Thanks to this tremendous interest for investors, the space has seen rapid expansion in recent months as companies have stepped up to the plate in order to offer more targeted exposure to the Chinese equity market. Although iShares maintains a stranglehold on the market, new participants– including a series of sector funds from Global X and an A-Shares tracking fund from Market Vectors– have cropped up challenging the San Francisco-based issuer’s dominance. As a result, iShares has moved to further develop the China equity space and expand its overall product lineup with a recent SEC filing proposing a new China equity ETF. Although the ticker symbol and the expense ratio were not available, we have highlighted some of the key details from the SEC filing below:

The proposed fund plans on tracking, before fees and expenses, the MSCI China Index which is a free-float adjusted market capitalization weighted benchmark designed to measure the performance of equity securities in the top 85% by market capitalization of the Chinese equity securities markets. This is represented by the H-Share (i.e., securities of companies incorporated in the People’s Republic of China that are denominated in Hong Kong dollars and listed on the Hong Kong Exchange) and B-Share (i.e., securities of companies incorporated in the People’s Republic of China and listed for foreign investment on the stock exchanges in the People’s Republic of China) markets [see the Definitive Guide To China ETFs].

The Underlying Index also includes certain Hong Kong listed securities known as Red Chips (issued by companies controlled by entities owned by the national government or local governments in the People’s Republic of China) and P-Chips (issued by companies controlled by individuals in the People’s Republic of China and deriving substantial revenues or allocating substantial assets in the People’s Republic of China). As of December 20, 2010, the Underlying Index had 140 constituents, approximately 55% of which were H-Shares, 24% were Red Chips, 20% were P-Chips and 1% were B-Shares, and its three largest sectors by component weighting were financials, energy and telecommunication services [also take A Closer Look At The China A-Shares ETF].

If approved, the fund would mark the fifth fund from iShares in the China Equities ETFdb Category, a space which the ETF giant currently dominates. The top two products from the company, FXI and EWH account for well over 75% of the total assets in the category but offer exposure to different slices of the market than the fund currently in the iShares pipeline. EWH focuses on companies domiciled in Hong Kong and as a result, has an investment profile more tilted towards financials and utility firms. Meanwhile, FXI tracks the 25 largest companies in the Chinese market which has led the fund to be heavily concentrated in a few sectors, most notably financials and energy firms [read Round Out Your China Exposure With These Three ETFs].

The proposed fund from iShares could move towards providing a more diversified investment picture of the Chinese market while combining some of the top holdings from both FXI and EWH which would allow investors to achieve exposure to both the developed market of Hong Kong and the emerging market of mainland China in a single ticker. If iShares is able to garner the same level of interest that it has in some of its other China funds, we could see the company extend its AUM lead even more over the upstart firms in the highly competitive space [see all the ETFs in the China Equities ETFdb Category Here].

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Disclosure: no positions at time of writing.