A simple and yet compelling China ETF strategy

Chart 1 shows the performance all ten China-focused ETFs listed on the London Stock Exchange since January 2013, and the white line represents our ETF benchmarked against the FTSE China A50 Index. Let’s examine the reasons for its outperformance of its peers since inception back in January 2014.

Chart 1: China-focused ETFs listed on London Stock Exchange
Chart 1: China-focused ETFs listed on London Stock Exchange
Source: Bloomberg, April 2013 to February 2019
Past performance or achievements are not indicative of current or future performance.

The FTSE 50 China A50 Index is one of the first foreign indexes designed to offer a performance measure on the China A-Share market. It was created in 2003 and offers investors exposure to the top 50 stocks by market capitalisation listed on the Shanghai and Shenzhen stock exchanges.

The Chinese economy is a socialist, market-driven one and therefore much of its power and direction are centred on central government-created corporations – state-owned enterprises, or SOEs.

The Chinese equity markets were only created in 1993, and therefore most companies in China started out as SOEs. Over the past quarter century, the Chinese government has reduced its investment in these companies. The government is now only a minority shareholder in most. For instance, ICBC, the world’s second largest bank by market capitalisation and one of the world’s largest global custody banks, was listed on the Shanghai and Hong Kong stock exchanges in 2006, and the Chinese government now holds less than 23% of its stock.

These traditionally close links to the Chinese state and their access to the state mechanisms ensure that these companies are pillars of the economy in China. These companies also have the best interpretation of government policy, and their well-established position in their respective sector allow them to be the upper echelon of Corporate China.

As well as providing excellent participation in the Chinese economy, the FTSE 50 China A Index is also the focus of most investment into China from Hong Kong, Singapore, Taiwan, etc., with over USD 4 billion in total assets under management (AUM).

And as the trade war is fading and the expansion of the Chinese middle class continues, companies included in the FTSE China A50 Index should yet again reap the benefits of a growing Chinese economy. Last but not least, although China is already the world’s second largest economy, it is, however, still an emerging market and as with all EM countries, volatility tends to be higher and due diligence on the underlying is a must.

In closing, the FTSE 50 A Share Index offers international investors the following:

  • Internationally renowned index provider with 15 years track record

  • Transparent and clear index rules and regulations 

  • Invests into 50 of China’s best known and most respected companies

  • Large cap liquidity available via Stock Connect, QFII and RQFII

  • Co-investing alongside the Chinese state

  • Easy access, UCITS ETF structure available to European investors on London Stock Exchange, Xetra and Milan

Commerzbank Disclaimer
The views expressed in this article are those of the author and may differ from the published views of Commerzbank Corporate Clients Research Department, the communication has been prepared separately of such department. No representations, guarantees or warranties are made by Commerzbank with regard to the accuracy, completeness or suitability of the data.