The iShares FTSE A50 China Index ETF (02823.HK) has been trading at a discount to its net asset value (NAV) for the past four months despite a sharp rally in A shares after the launch of the Shanghai-Hong Kong Stock Connect.
A principal reason is that several investors in the ETF opted to take profits after the launch of the cross-border stock trading program, according to an executive overseeing the fund.
“The concept of the Shanghai-Hong Kong Stock Connect started floating in June and July last year; and [positions were built up] significantly… but after the launch of the Stock Connect, redemption requests began to take place,” said Cyrus Mui, vice president for product strategy at iShares ETF.
“Certain investors sold their positions in (iShares FTSE A50 China Index ETF) to take profits after the launch of the Stock Connect,” he said, noting that investors now “have other means to enter the A-share market”.
Susan Chan, head of iShares at Asia Pacific, said overseas investors were able to buy into A-shares via the Stock Connect scheme instead of waiting for QFII and RQFII quotas.
“There was then a sharp rally in A shares but H shares were not on par,” Chan said. Some people then began short-selling A-shares and picking up H-shares, she said.
Mui also said that short-selling of the exchange-traded fund (ETF) that tracks the performance of the FTSE China A50 Index has increased.
“When the A-share market is on an upward trend, some investors may think the rally is about to end and they need to have some hedging for their positions… Hence they short-sell positions in the ETF,” he said.
But he said the short-selling practice is a good thing for the ETF market, as it enables ETFs to serve as financial instruments rather than being just an exposure tool to the A-share market.
A-share ETFs accounted for more than 30 percent of short-selling turnover on the Hong Kong Stock Exchange in December 2014 when there was a big rally in the mainland’s A-share market.
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