Examining A-Shares ETFs

Exchange-traded funds holdings Chinese A-shares, the stocks trading on mainland bourses in Shanghai and Shenzhen, have gotten ample attention this year, as China's equity markets have delivered both substantial gains and rapid losses underscoring the volatility that comes with investing in the world's second-largest economy.

New York And China A-Shares

The Deutsche X-Trackers Harvest CSI 300 China A-Shares ETF (NYSE: ASHR), the largest A-shares ETF trading in New York, shows a year-to-date loss of 2.6 percent, but that masks a six-month decline of nearly 32 percent.

ASHR's small-cap equivalent, the Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap ETF (DBX ETF Trust (NYSE: ASHS)) and the Market Vectors ChinaAMC SME-ChiNext ETF (Market Vectors ETF Trust (NYSE: CNXT)) are down an average of 37 percent over the past six months – after both A-shares small-cap ETFs sported year-to-date gains of more than 100 percent earlier this year.

CHAD And ASHR

The struggles of A-shares ETFs and short sellers targeting ASHR have helped make the Direxion Daily CSI 300 China A Shares Bear 1X Shares (NYSE: CHAD) not only the best-performing A-shares ETF this year, but one of 2015's most successful new ETFs.

“ASHR experienced approximately $565 million of outflows and now has $470 million in assets as the outflows have largely ended. In December, Chinese companies began to come public again, after such corporate actions were suspended in July, a sign of the capital markets are returning to normal.

“Meanwhile, Vanguard recently began to slowly add China A shares to its emerging market ETFs and mutual funds,” said S&P Capital IQ in a recent note.

The KraneShares Trust (NYSE: KBA) is another contender in the A-shares ETF space and is the first of the bunch to track an index from MSCI. When A-shares liquidity was pinched during trading halts earlier this year, KraneShares nimbly moved to use a sampling strategy instead of directly replicating the MSCI China A International Index.

Waiting On China

Market participants are still waiting on China to meet some requirements set forth by MSCI before the index provider elevates A-shares to major international benchmarks, including the MSCI Emerging Markets Index.

“ASHR focuses on larger-cap Chinese securities and has significant exposure to financials (39 percent of assets), with more modest exposure to industrials (18 percent), consumer discretionary (11 percent) and information technology (7 percent). The weighted average market capitalization of ASHR was $30 billion,” said S&P Capital IQ.

“ASHS has much different exposure. Financials are just 9 percent of assets, much lower than industrials (24 percent), consumer discretionary (16 percent) and technology (15 percent). The weighted average market cap of the ETF's holdings was $2.6 billion.”