New China ETF Is for Investors Bullish on Banks
If you're unfamiliar with the various types of Chinese stocks, here's a quick primer. N-shares trade in the U.S. (The "N" stands for New York), H-shares trade in Hong Kong, S-shares trade in Singapore, B-shares trade in Shenzen and A-shares trade in Shanghai.
The A- and B-shares have only been accessible to local Chinese, but in the last few years certain foreign institutional investors were granted access to these markets. And some fund companies were able to create products that provide exposure to retail investors.
The Market Vectors China ETF (PEK) also invests in the A-share market, but it uses a different benchmark than CHNA.PEK does not own individual stocks because of the restrictions on access to the A-share market. Instead, it owns futures contracts to replicate the exposure to the index. CHNA uses a similar technique of investing in futures contracts on the FTSE China A50 Index. These futures are traded in Singapore. As is the case with most large-cap China ETFs, financials constitute the majority of CHNA's holdings. Financial stocks account for 67% of the index that CHNA tracks. Consumer staples and materials make up another 8% each, with several other sectors having smaller weightings. Given that the index has only 50 holdings, the single-stock risk is reasonable: China Minshen Banking is the fund's largest holding, at 7.5%. The top five holdings, all financials, account for 30% of the fund. Over the weekend, Barron's published several articles that made a point I've been making for years, which is that the broad, mega-cap funds such as iShares China Large-Cap ETF (FXI), PEK and now CHNA don't effectively capture China's ascendant middle class or the Americanized lifestyle to which many Chinese aspire. The big funds tend to be dominated by financial companies, which make up 55% of FXI's holdings, 38% of PEK's and 67% of CHNA's. Although FXI is down 2.7% this year and PEK is down 6.0%, the Global X China Technology ETF (QQQC), which captures more of the consumer theme, is up more than 45% so far this year.
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