London-based Source launched its Irish-domiciled China A shares ETF on the London Stock Exchange yesterday. In close succession, Deutsche Asset and Wealth Management plan to trade a rival product on the LSE and Deutsche Börse on 16 January.
Up until now, investing directly in the domestic Chinese stock market (A shares) proved to be a challenge for investors. There has only been one ETF that allowed investors to invest somewhat in China through the synthetic CSI 300 A-Share Index ETF, which did not actually buy shares but used derivatives to mimic the value of Chinese shares.
Not liking the synthetic ETF, many investors bought Chinese shares listed in Hong Kong (H shares and Red Chips) or bought ETFs based upon the HSCEI index or the FTSE China 25 index from rival companies like iShares.
“The trouble with the H-shares and Red Chips is that there is not much choice and the companies tended to be the big ugly state run companies, rather than new, innovative, fast growing companies,” Peter Sleep, senior portfolio manager at Seven Investment Management, said.
The two new ETFs will enable investors to pick from a much broader range of companies for their portfolios. Source covers the biggest 50 companies while Deutsche’s db X-trackers covers the biggest 300 companies.
Investing through db X-tracker will be slightly less expensive with a TER of 1.1% (110 basis points). It offers investors the option to place their cash into smaller companies that may be faster growing, which over time could provide better returns than large companies. The TER of the Source product is 1.11% (111 basis points).
“I think these two new ETFs are very interesting as it will allow investors to buy Chinese shares directly using physical ETFs. China is the world’s second largest economy and now you can buy into that directly with these two ETFs,” Sleep added.
The launch of the ETFs echoes news earlier this week that Ashmore has become the first fund manager outside of Hong Kong to receive a licence which will allow it to invest in China’s domestic securities market.
(Updated on 13 January 2014.)
