China’s economy has been growing at a swift rate for many years. However, while its growth is still robust, it has slowed to 7.4% GDP growth in 2014 from 7.7% GDP growth in 2013. For 2015, GDP growth is expected to slow again to around 7.0%. This is due to slowing global demand. These facts should lead to a simple conclusion: don't invest in China. But it’s not that simple.
With 24 central banks around the world lowering interest rates so far in 2015, cheap money is available to help fuel growth. Of course, this will be debt-fueled growth in many situations, which will only cause more problems down the road. But for now, it’s possible (not guaranteed) that the uptrend continues. At the root of it all, the global economy is weakening, not strengthening. Therefore, it would be wise to use caution. (For related reading, see: Top 6 Factors That Drive Investment in China .)
As far as investing in the Shanghai Composite Index, this used to be impossible for foreign investors, but it’s now possible in several different ways, the most popular being Deutsche X-trackers Harvest CSI300 CHN A (ASHR ).
This exchange-traded fund (ETF) will allow you to invest in the CSI 300 — the largest and most liquid stocks in China’s A-Share market. On the surface, it would appear that other ETFs offer a very similar yet better opportunity, but it’s important to look at every detail. (For more, see: China’s Economic Indicators .)
Let’s start with the good news. ASHR has appreciated has appreciated nicely since its launch on Nov. 6, 2013 adn returned 51.32% in 2014 (and is up 11.91% YTD). This is to go along with a small dividend yield of 0.24%. Additionally, this ETF averages 764,500 shares traded daily, which makes it liquid enough to keep the bid/ask spread tight. Furthermore, ASHR is highly diversified. For instance, it has 302 total holdings, and its sector breakdown is as follows (all figures are as of 4/28/15):
Financial Services: 36.36%
Consumer Cyclical: 8.36%
Communication Services: 1.06%
Top 10 Holdings:
Ping An Insurance: 4.10%
China Minsheng Banking Corp. Ltd: 3.14%
China Merchants Bank Co. Ltd: 2.69%
CITIC Securities Co. Ltd: 2.66%
Industrial Bank Co. Ltd: 2.15%
Shanghai Pudong Development Bank Co. Ltd: 1.81%
Haitong Securities Co. Ltd: 1.95%
China Vanke Co. Ltd: 1.37%
China State Construction Engineering Corp. Ltd: 1.18%
China Pacific Insurance Group: 1.11%
Based on what you have read so far, you might ask, “What’s not to like?” That’s a good question, but the answer is simple. The one big negative is an expense ratio of 0.80%. This will eat into your profits and accelerate your losses. The Category Range is 0.49%-1.10%, with the Category Average at 0.71%. Therefore, ASHR is a little bit on the expensive side. Does this mean you should consider three competitors instead? (For more, see: China's GDP Examined: A Service-Sector Surge .)
3 Similar Options
If you’re going to consider another option, begin with Market Vectors ChinaAMC A-Share ETF (PEK ). It has an expense ratio of 0.72%. This is almost at the Category Average, but it’s still high. Since both ETFs are tracking the CSI 300, the holdings are nearly identical. Therefore, with a lower expense ratio, you might be wondering why PEK isn’t the hands-down winner. There are two reasons. One, PEK isn’t nearly as liquid. average 70,754 shares traded daily. This will lead to a wider bid/ask spread and can make it more expensive for you to initiate a position. Two, though not as important, is no dividend yield. Despite these negatives, PEK isn’t a bad option — assuming you’re interested in the CSI 300 at this point in time.
KraneShares Bosera MSCI China A ETF (KBA ) should not be considered. With an expense ratio of 0.85%, no yield, and 12,491 shares traded per day, it doesn’t offer you any advantages over ASHR and PEK. (For related reading, see: A Look at KraneShares CSI New China ETF KFYP .)
Then there’s CSOP FTSE China A50 ETF (AFTY ), which is the newest player in the game. It tracks 50 large-cap stocks across nine sectors. This doesn’t offer as much diversification as its peers, and an expense ratio of 0.99% is too high. (For more, see: China ETFs: Get in as China Matures .)
The Bottom Line
If you want to invest in the Shanghai Composite Index with access to China’s A-Share stocks, then you should consider ASHR and PEK before other options. However, ASHR and PEK offer different advantages, so be sure to dig deeper. (For more, see: Chinese Sector Investing with ETFs .)
Dan Moskowitz does not own shares in ASHR, PEK, KBA or AFTY. He is currently long DRR, TECS, FAZ, TWM and BIS.