ETF

Investing in China? Top Passive ETFs for your consideration

When it comes to the selection of broad market ETFs for the Chinese market, investors in Singapore are not exactly spoiled for choices. The selection in SGX is downright pathetic.

Investing in US-domiciled ETFs listed on US exchanges expose an investor to the 30% dividend withholding tax. As a result, to optimise your returns, I will only be listing ETFs that are listed on the Hong Kong Stock Exchange (HKEX). For Singaporeans investing in HK-listed ETFs, the dividend withholding tax rate is 0%.

Background on the Chinese stock market

Navigating the stock markets in China can daunting considering the different types of share classes available. As of May 2019, there are 7 share classes available. Out of the 7 share classes, 3 are for securities incorporated in China. They are known as the A Share, B Share and H Share.

A-share and B-share are shares that are listed on the mainland Chinese stock exchanges. The difference between A-share and B-share is that A-share is denominated in CNY (Renminbi) while B-share is denominated in foreign currencies. H-shares are shares traded on HKEX.

There are two stock exchanges in mainland China, Shanghai stock exchange and Shenzhen stock exchange.

For more information, refer to the attached guide from FTSE Russell: FTSE – Guide to Chinese Share Classes

For more information on Chinese stock exchanges, see: https://www.thebalance.com/china-stock-market-shanghai-shenzhen-hong-kong-3305480

The unique feature of A-share class security is that only mainland Chinese investors and foreign institutions under the Qualified Foreign Institutional Investor (QFII) program, are allowed to purchase the A-share class securities.

iShares Core MSCI China Index ETF ~ 2801.HK

2801.HK is issued by Blackrock and the fund has been around since November 2001. The ETF tracks the MSCI China Index and it has an approximate AUM of HKD 4 billion. It is denominated in Hong Kong dollars and has a decent trading volume, i.e. you should not have an issue with a large fluctuating bid-ask spread.

2801.HK invests in Chinese securities listed in mainland China, as well as outside of mainland China. In other words, it invests in securities across the different share classes. As of 26 Sept 2019,

  • The top 3 holdings in 2801 are
    • Alibaba (14.33%)
    • Tencent (13.96%)
    • China Construction Bank (4.20%)
  • The management fee is at 0.20% p.a. and the Total Expense Ratio (TER) should come in at less than 0.40% p.a.

Please note that the fund recently underwent a resolution which has an impact on the Total Expense Ratio.

For more information, see: https://www.blackrock.com/hk/en/ishares/proposed-enhancements-2801-ishares-msci-china-index-etf-passed

The main reason why I like this ETF is that it is established. It has been around since 2001 and the AUM is large enough for Blackrock to want to continue to manage this fund. Therefore, the fund closure risk is very low.

This ETF is ideal for long-term buy and hold strategy.

For more information on 2801.HK, see: https://www.blackrock.com/hk/en/products/251576/ishares-msci-china-index-etf

ETF issuers are known to close down funds if the fund did not manage to attract flows. Managing an ETF is expensive even more so in an emerging market like China.

MSCI is poised to increase the percentage holdings of A-shares in MSCI Indexes from the current 5% to 20% in three phases. For more information, see the attached press release from MSCI: MSCI Press Release – A Shares

iShares FTSE A50 China Index ETF ~ 2823.HK

2823.HK is also issued by Blackrock and the fund has been around since November 2004. The ETF tracks the FTSE China A50 Index and it has an approximate AUM of RMB 20 billion and it is denominated in Hong Kong dollars. 2823.HK trading volume is significantly higher than 2801.HK. Therefore, you should not have any issue with fluctuating bid-ask spreads.

The most compelling reason to invest in 2823.HK is that 2823.HK holds the 50 largest A-shares securities in mainland China, trading on the Shanghai and Shenzhen Stock Exchanges. As of 26 Sept 2019,

  • The top 3 holdings in 2823 are
    • Ping An Insurance (14.47%)
    • Kweichow Moutai (9.18%)
    • China Merchant Bank (7.37%)
  • It has a TER of 0.99% p.a.

If you are only interested in Chinese securities listed on the Chinese stock markets, 2823.HK is the way to go. However, do note that the TER is on the high side.

If having exposure to the top 50 securities is a concern to you from a diversification perspective, you might want to consider 2846.HK which invest in the 300 largest securities listed on mainland China, trading on the Shanghai and Shenzhen Stock Exchanges.

For more information on 2823.HK, see: https://www.blackrock.com/hk/en/products/251797/ishares-ftse-a50-china-index-etf

For more information on 2846.HK, see: https://www.blackrock.com/hk/en/products/251754/ishares-csi-300-a-share-index-etf

Vanguard Total China Index ETF ~ 3169.HK

3169.HK is issued by Vanguard and the fund has only been around since May 2018.

The ETF tracks the FTSE Total China Connect Index and it has an approximate AUM of RMB 157 million (~USD 22m). It is denominated in Hong Kong dollars and 3169.HK trading volume is significantly lower than the rest of the ETFs mentioned above. Therefore, you may counter some issue with fluctuating bid-ask spreads.

Similar to 2801.HK, 3169.HK invests in Chinese securities across the different share classes. As of 31 Aug 2019,

  • The top 3 holdings in 3169 are
    • Tencent (9.05%)
    • Alibaba (8.06%)
    • China Construction Bank (2.66%)
  • It has a TER of 0.40% p.a.

Since the fund has only been around for less than 2 years, I would exercise more caution before investing in this fund.

For more information on 3169.HK , see: https://www.vanguard.com.hk/portal/v/total-china.htm?lang=en

Note that Vanguard discloses their holdings on a monthly basis rather than daily. As a result, I can only find the top holdings as of month-end August at the time of writing this article.

Where to find more China ETFs?

I have selected the above ETFs on the basis that,

  • The fund is issued by very reputable fund issuer
  • Listed on the Hong Kong Stock Exchange (HKEX)
  • Benchmark against ‘reputable’ benchmarks from either MSCI or FTSE

Frankly, the above selection basis will only give us a couple of solid selection. However, if you are interested in the full list of China-oriented ETFs that are listed on HKEX, see: https://www.hkex.com.hk/Market-Data/Securities-Prices/Exchange-Traded-Products?sc_lang=en

On the left-hand side of the HKEX webpage, select the appropriate filter settings and you should be able to see all the China-oriented ETFs that are listed on HKEX.

Conclusion

As China transit from an industrial nation to an economy that is oriented around goods and services, it will offer investors untapped opportunities. Having said that, investing in China does come with its own unique set of dangers such as rising corporate debt defaults, communist structure, regulatory environment, political stability and etc. However, due to the size of the Chinese market and its potential, I believe the benefits that come from a rising China will surpass the negatives of investing in China.

As always, take personal responsibility of your financial well-being and do your own due diligence.

 

 

Disclaimer: This article does not constitute a solicitation to buy/sell any securities that may be mentioned in this article. At the time of writing and publication, the author held positions in 2801.HK. All other securities mentioned by the author in this article are not held by the author. I am writing in my personal capacity and my views do not represent that of any organisations.  

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10 replies »

    • Personally, I am using Interactive Broker. The commission is very low compared to our local brokerages. I believe I paid around 3 SGD for a trade executed on the Hong Kong Stock Exchange and 40 cents US for a trade executed on NYSE. Compare to the fees charged by Vickers, UOB KH or even FSM, it is night and day.

      However, IB is a foreign broker, so in terms of support, there may be some delays (1 day in my experience). Also if your AUM is less than 100K USD, they will charge you USD10/month. However, for your FX conversion, you can convert it at near spot-rate so it will pretty much offset your USD10/m if you regularly contribute to your account and conduct FX conversion for your trades in HK/US/UK.

      Like

  1. Very good info thanks. If I may just add one suggestion, since the title of the article is “Passive Income..”, may not be a bad idea to mention their yield in the discussion.

    Like

    • Hi Andrew, thank you for your comment and suggestion. Actually, the article is titled “….Top Passive ETFs…..”. I am referring more along the lines of passively managed ETFs rather than ETFs that generate high passive income for the investor.

      Although the ETFs that are mentioned in this article do pay out dividends, they are not exactly what I would call passive income ETFs since the dividend distribution yield is not exactly fantastic (less than 3% if I remember correctly).

      Like

  2. Please beware that 2823 and 2846 are synthetic ETF which do not hold physical shares of the stocks they are tracking. You may argue that Blackrock may not fail given its size but you cannot day the same for all its counterparts involved in various derivatives/contracts. There are other better physical ETF out there.

    Like

    • Hi Alex

      I have looked through the funds’ prospectus to double-check my understanding.

      Actually, both 2823 and 2846 adopted a representative sampling strategy, i.e. physical replication. While both funds are allowed to invest in financial derivative for non-hedging (investment) purposes, such investments are capped at 10% of the fund’s NAV.

      I have taken a brief look at the latest holdings files for both funds, there is hardly any derivatives position if any. Of course, this is not indicative of their future position. Both funds may very well max out the 10% limit on derivatives in the future.

      But one thing is for sure, I would not label 2823 and 2846 as synthetic ETFs.

      Like

  3. I am not familiar with interactive broker. US$10/month is US$120/year which is a lot. The custody fee is scary if one is not careful.
    It seems more suitable for trading then and not passive investing.

    Like

    • It is not a custody fee as IB does not charge custody fees. The USD 10/month is an inactivity fee which is only applicable if your account size is less than 100k USD.

      If you do not have any transactions for the month, you will be charged the full USD 10 for the month. Any commission that is generated for the month is used to offset the USD 10. For example, if your trades for the month generated USD 7 in commission, you will end up paying $3 for your inactivity fee for that month.

      But I agreed that the USD 120/year can be daunting if you are not contributing to your account regularly.

      Like

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