Van Eck Global has launched Market Vectors China ETF, the first US-listed exchange-traded fund designed to give investors exposure to China’s A-shares market, which represents all stocks traded on China’s two main exchanges in Shanghai and Shenzhen.
The fund seeks to track the performance of the CSI 300 Index, an index which captured approximately 64 per cent of the total market cap of these two exchanges, as of 30 September 2010.
As China’s local A-share market has historically been restricted to the country’s domestic investors and qualified foreign institutional investors, many emerging market and BRIC funds are not able to include the A-share market in their country weighting schemes, leading to a fundamental underweighting of China’s true equity market in these funds.
For this reason, Van Eck believes that gross domestic product may be an important factor to consider when investing in international markets. Since 1996, China’s GDP has ranked first among all emerging markets and since June 2010 it has surpassed Japan as the second largest economy in the world (after the US). This illustrates China’s growing dominance within the global economy, a position that many market capitalisation weighted products do not capture.
"Because of its size and growth, we believe effective diversification requires investors to have broad exposure to China and this, in turn, requires exposure to A-shares traded on the Shanghai and Shenzhen Exchanges. Without A-shares, investors are missing significant exposure to a world economic powerhouse," says Jan van Eck, principal at Van Eck Global. "After all, China’s equity market in total currently accounts for 33 per cent of the emerging market universe. With PEK, we are pleased to offer investors a way to access the A-Share marketplace–a marketplace that accounts for nearly a quarter of all emerging markets equities and 72 per cent of China’s equities."
Currently, most other US funds offering China exposure invest in shares listed on exchanges in Hong Kong (H-shares) or elsewhere. H-shares account for just four per cent of all emerging market equities and only 13 per cent of China’s total equity market. The lack of access to the A-share market prevents investors from gaining broad representation of China’s true domestic market.
ETFs tracking China A-shares are already available in Asian markets. As of 7 October, there were 24 China A-share-based ETFs listed on the Hong Kong Stock Exchange. Eight of these track the broad China market while the remaining 16 track specific industry sectors. In addition, the Singapore and Taiwan Stock Exchanges together list three broad market China A-share ETFs. The Tokyo Stock Exchange has two broad-based China A-share ETFs. All 29 ETFs use derivative instruments to replicate the performance of their underlying benchmarks.
The fund will not invest directly in A-shares immediately; instead it expects to invest in swaps and other types of derivative instruments that have economic characteristics that are substantially identical to the economic characteristics of China A-share stocks.
The fund carries a net expense ratio of 0.72 per cent and a gross expense ratio of 0.85 per cent.