The exchange-traded funds (ETFs) available for U.S. investors that offer exposure to Chinese stocks are continually expanding as China's economy moves more toward center stage in the global economy. The 2014 opening of the Shanghai-Hong Kong Stock Connect program, which allows direct trading of Shanghai-traded A-shares by investors outside mainland China, has increased investment interest in both A-shares and in the Hong Kong Stock Exchange-listed H-shares.
However, as of December 2015, no ETFs are available that directly track the Hang Seng Index (HSI), the primary benchmark index for blue-chip stocks traded on the Hong Kong exchange. Investors can substitute fairly well for the lack of a specific Hang Seng Index ETF with ETFs that generally mirror the overall performance of Chinese equities. A growing number of ETFs include holdings of all the China equity share classes, including N-shares of Chinese companies listed on U.S. exchanges.
After a substantial 2015 downside market correction in Chinese stocks, many analysts are expecting Chinese equities to outperform in 2016. Consider these Chinese ETFs either as primary portfolio investments or for purposes of global diversification.
1) IShares MSCI Hong Kong ETF
The iShares MSCI Hong Kong ETF (NYSEARCA: EWH) is one of the most widely traded, and therefore most liquid, Chinese ETFs. It is also one of the oldest single-country ETFs, launched by BlackRock in 1996. It has $2.5 billion in total assets under management (AUM) and an average daily trading volume of $58 million.
This ETF tracks the MSCI Hong Kong Index, a market cap-weighted index made up of a diverse selection of small-, large- and mid-cap stocks primarily traded on the Hong Kong Stock Exchange. The fund's holdings are dominated by financial-sector stocks, which account for approximately 70% of the portfolio. The next two most heavily represented market sectors are consumer cyclicals and utilities. Ordinarily, the fund's assets are 80% or more invested in the stocks contained in the underlying index or in depositary receipts that represent securities contained in the index.
The fund's top five holdings are AIA Group, CK Hutchison Holdings, Hong Kong Exchanges and Clearing, Sun Hung Kai Properties and Cheung Kong Property Holdings. Other holdings include Hang Seng Bank and Hong Kong and China Gas. The fund's annual portfolio turnover ratio is a modest 7%.
One of the benefits of this ETF is its expense ratio of 0.48%, well below the category average of 0.68%. The fund offers a dividend yield of 2.51%. The 10-year average annualized return is 7.41%. Morningstar rates this ETF as low-risk, with average to above-average returns. This ETF is well-suited to investors seeking exposure to Hong Kong-traded Chinese stocks who prefer the relative safety of a large, well-established fund with high liquidity.
2) IShares China Large-Cap ETF
The iShares China Large-Cap ETF (NYSEARCA: FXI) was launched by BlackRock in 2004. This ETF aims to mirror the performance of the FTSE China 50 Index, which is composed of 50 of the largest and most liquid stocks traded on the Hong Kong exchange. This index is probably the closest to the Hang Seng Index. This is one of the most popular China ETFs, with $5.3 billion in assets and an average daily trading volume of $800 million. The fund offers superior liquidity with an average bid-ask spread of just 0.03%.
Like the EWH fund, this ETF has a strong concentration in the financial sector, followed by the technology, telecom and energy sectors. Among the major portfolio holdings are Tencent Holdings, China Mobile, China Construction Bank, the Industrial and Commercial Bank of China, and the Ping An Insurance Group Company of China. The fund's annual portfolio turnover ratio is 36%.
The expense ratio for this ETF is one negative element of the fund, 0.74%, above the category average. The dividend yield is 2.19%. The fund's 10-year average annualized return is 7.42%. Morningstar rates this ETF as above-average risk balanced against average returns. This ETF is appropriate for investors who want access to large-cap Chinese equities by tracking an index similar to the Hang Seng – and who don't mind the high fees or the high fund concentration in financials.
3) First Trust Hong Kong AlphaDEX ETF
The First Trust Hong Kong AlphaDEX ETF (NASDAQ: FHK) is a considerably younger fund, launched by First Trust Advisors in 2012. As of December 2015, the fund has $142 million in assets, with an average trading volume around $640,000 per day. This ETF is not as liquid as the EWH or FXI funds; its average bid-ask spread is 0.5%.
The fund aims for investment results that correspond to the performance of the NASDAQ AlphaDEX Hong Kong Index. The underlying index is designed to identify stocks that offer superior risk-adjusted returns on investment relative to traditional stock indexes through the proprietary AlphaDEX stock selection methodology, which employs both growth and value metrics. FHK has primarily a value-investing, mid-cap focus. The average weighted market-cap value for stocks in the FHK ETF is $13.2 billion, compared to an average weighted market value of $33.6 billion for the EWH fund.
Financial sector stocks are again predominant, accounting for approximately half of the fund's holdings, followed by industrial sector stocks and utilities. Primary portfolio holdings are Sino Biopharmaceutical, Link Real Estate Investment Trust, Power Assets Holdings and Kingston Financial Group. The portfolio turnover ratio is 43%.
The expense ratio for the fund is a relatively high at 0.8%. This ETF offers an attractive dividend yield of 2.99%. The fund's three-year average annualized return is 1.05%. Morningstar rates the fund as below-average risk with average returns. This fund is well-suited for investors who believe that the AlphaDEX stock selection strategy results in superior returns on investment.
4) Guggenheim China Real Estate ETF
Investors who want to target ETF investments to the Chinese real estate market sector should take a look at the Guggenheim China Real Estate ETF (NYSEARCA: TAO), launched by Guggenheim Investments in 2007. The fund is not among the most liquid, with an average bid-ask spread of 0.6%, so it is not suitable for very active traders. The TAO ETF has garnered $18.5 million in AUM, and trading volume averages around $54,000 per day.
This ETF tracks the AlphaShares China Real Estate Index, which is designed to reflect the overall performance of the stocks of publicly traded Hong Kong and mainland China real estate companies and REITs. Hong Kong companies account for approximately 80% of the fund's 50-plus holdings, with the remainder made up of real estate firms or real estate investment trusts (REITs) based on the mainland. This fund holds H-shares, A-shares and some N-shares of Chinese real estate firms traded on U.S. exchanges. Major portfolio holdings include CK Hutchison Holdings, Fortune REIT, Sino Land Company, Hong Kong Land Holdings and Link REIT. The portfolio turnover ratio is relatively low at 16%.
The expense ratio of 0.7% for the Guggenheim China Real Estate ETF is right in line with the category average of 0.68%. This ETF offers a dividend yield of 2.65%. The five-year average annualized return is 0.76%. Morningstar rates the fund as high-risk, high-return.
5) CSOP China CSI 300 A-H Dynamic ETF
The CSOP China CSI 300 A-H Dynamic Index ETF (NYSEARCA: HAHA) is a new ETF, just launched by CSOP Asset Management in October 2015, with a unique investment strategy. The fund has approximately $4.5 million in assets and an average daily trading volume around $65,000. However, the ETF still shows reasonable liquidity, with an average bid-ask ratio of 0.14%.
This fund tracks the CSI 300 Smart Index. The index consists of the benchmark CSI 300 Index, which reflects the overall performance of equity shares traded on the Shanghai and Shenzhen stock exchanges, plus any corresponding H-shares traded on the Hong Kong exchange. There are typically substantial price differences between A-shares and H-shares of dual-listed companies, and this ETF's investment strategy attempts to enhance profitability by using an algorithm to select the share type most likely to outperform. This extra twist of investment strategy beyond simply mirroring the basic CSI 300 Index only comes into play in regard to approximately 20% of the fund's portfolio, since 80% of the CSI 300 stocks only trade as A-shares and have no dual-listed H-shares.
The top-five fund holdings as of December 2015 are the Ping An Insurance Group Company, China Merchants Bank Company, Citic Securities Company, Shanghai Pudong Development Bank and China Vanke Company. Due to this ETF's more active investment strategy, it has a higher portfolio turnover ratio than a similar ETF. For example, the Market Vectors ChinaAMC A-Share ETF simply tracks the CSI 300 Index and does not attempt to take advantage of price differentials between share classes. The portfolio turnover ratio has not been established, since the fund has only been trading for a few months.
The expense ratio for the HAHA fund is on the high end at 0.75%. The fund has not been trading long enough to establish dividend yield, performance or risk/reward ratings.
This ETF is suited to investors who want to adopt the fund's chosen investment strategy of trading price differentials between share classes and who have the necessary risk tolerance to invest in an unproven fund. It is not appropriate for risk-averse investors.