Chinese stocks have performed very well this year. According to MSCI, as of June 2017, the gross returns (US dollars) of the MSCI China Index were close to 25 percent in the first half of 2017. Instead of directly trading equities in the exchange market, investors who are optimistic about the outlook of Chinese equities can consider gaining exposure to China’s onshore A-share market via exchange traded funds (ETFs).
From a fundamental standpoint, the long-term outlook of Chinese equities looks encouraging. For instance, China’s economy has stabilized, as the official China manufacturing purchasing managers’ index (PMI) for June 2017 had climbed back to 51.7 while the average value of the manufacturing PMI for the first half had reached 51.5, up 1.7 percentage points from the same period last year.
Second, the inclusion of China A shares in the MSCI Emerging Markets Index in 2018 should facilitate the development of China’s A-share markets and raise the profile and prominence of Chinese stocks in global markets, meaning China’s equity market should attract more capital from international investors.
However, when we look at Hong Kong investors’ investment preference, they tend to be stock pickers and express home bias for mainland Chinese or Hong Kong investments. However, there are several distinct advantages in investing in mainland A shares through Hong Kong-listed ETFs.
Using ETFs as portfolio building blocks
Achieving cost-efficiency is one of the advantages of investing in Chinese equities through ETFs. Being an index-tracking financial instrument, ETFs achieve diversification by investing in a basket of securities and is a cost-effective tool for diversifying investments in portfolios.
Furthermore, the management fees charged by ETFs are generally far lower than those of mutual funds – meaning investors can keep more of what they could potentially earn. ETFs are an ideal tool for investors to consider as they can be used to gain exposure to major benchmarks at low fees, and in this case, that would be China A shares.
However, when choosing an ETF, investors should investigate if the ETF provider has experience developing, managing and supporting ETFs – particularly in the Asia region and type of exposure that you want.
One of the important things to look for is the quality of disclosure by the ETF provider – investors should be able to see what they own and how it is performing in a clear, easily accessible manner that adheres to international standards of performance benchmarking.
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