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Invest in domestic chinese stocks with ETFS-E Fund MSCI China A GO UCITS

In May 2014, ETF Securities partnered with E Fund, one of the largest asset managers in China, to launch a physical exchange-traded fund (ETF) that tracks physical A-shares listed in China. It is the first UCITS ETF to track the MSCI China A Index.

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Domiciled in Ireland, the ETFS-E Fund MSCI China A ETF is listed on the London Stock Exchange, Deutsche Boerse and Euronext Amsterdam.

The MSCI China A Index is designed to reflect the most comprehensive investment opportunity set of Chinese companies with A-share listings on the Shanghai or Shenzhen Stock Exchanges.

Henri Boua, Associate Director, France and Monaco, ETF Securities comments: « ETFS-E Fund MSCI China A GO UCITS ETF aims to track the performance of the MSCI China A Index that comprises over 460 Chinese stocks and provides more diversified sector coverage than other China A indices which typically have a high concentration in fewer sectors and stocks. »

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Until recently, foreigners have had limited access to China’s domestic equity markets, with most investors only able to gain exposure through a limited number of Chinese stocks listed on overseas markets such as the Hong Kong and New York stock exchanges. This has now changed, with the Chinese government opening the door to foreign investment in local Renminbi (RMB) denominated equity markets (China A-shares) through its Renminbi Qualified Foreign Institutional Investor (RQFII) program.

What are China A-shares?

China A-shares are the shares of companies incorporated in mainland China and traded in Shanghai or Shenzhen, quoted in Chinese Renminbi (RMB). Their stocks are restricted to domestic investors mainly and also a limited number of qualified foreign investors through Qualified Foreign Institutional Investor (QFII) or Renminbi Qualified Foreign Institutional Investor (RQFII) programmes. As a result, foreign investors and ETFs typically invest in offshore stocks listed in Hong Kong and the US. ETFS-E Fund MSCI China A GO UCITS ETF (CASH) gives investors direct access to the China A share market through the RQFII program.

Why invest in China A-shares?

According to ETF Securities, A-shares are the cheapest they’ve been since the 2008 global financial crisis. China equities have underperformed developed market equities over the past few years and valuations reflect this. China A-shares as measured by the MSCI China A Index are now the cheapest in PE terms they’ve been since the worst part of the 2008 global financial crisis. “With the Chinese government committing itself to accelerated economic reform and financial liberalisation at its watershed Third Party Plenum in November 2013, economic growth stabilizing in a more sustainable 7-8% range and China’s equity market capitalisation still low relative to the size and importance of its economy, we believe China A shares have excellent long-term prospects” says Henri Boua.

Why invest in the MSCI China A Index?

The MSCI China A Index has the broadest and most comprehensive A-share stock coverage, with strong historical outperformance compared to other A-share benchmarks. In addtion, over the past five years, the MSCI China A Index has been the strongest performing China A-shares benchmark index, outperforming both the CSI 300 and FTSE A50, with lower volatility.

The MSCI China A Index has also a lower concentration of exposure to financials and large cap state-owned enterprises than other major China A-share indices and a higher exposure to consumer, industrial and health care sectors. In addition, according to ETF Securities, MSCI’s target representation approach to index construction is viewed as a more effective way to capture the fast changing landscape of the China A-share market than indices that fix the number of constituent stocks such as the CSI 300 and the FTSE A50 indices.

Finally, the MSCI China A Index also has the advantage of being part of the MSCI family of indices, meaning that only the MSCI China A index can be seamlessly integrated with the MSCI Emerging Markets Index once China A-shares are included in the benchmark. On end-2013 data, it is estimated that China A-shares could make up to 13% of the MSCI Emerging Markets Index once they are included in the index (current estimates are that inclusion may begin in 2015). With around US$1.4 trillion tracking the MSCI Emerging Markets Index, that would equate to approximately US$180 billion of emerging markets tracking funds needing to gain exposure to China A-shares.

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Why invest in ETFS-E Fund MSCI China A GO UCITS ?

The ETFS-E Fund MSCI China A GO UCITS allows to track the MSCI China A Index at a limited cost (a total expense ratio of 0,88%) and is a significant step for European investors who wish to access the opportunities provided by the domestic chinese equity market.

Next Finance , January 2015

Article also available in : English EN | français FR

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