Tech Weights Have Determined What China ETF Outperformed

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Chinese markets have popped over the last year, but due to the varying indexing methodologies, different indices and related exchange traded funds will exhibit differing performances.

Investors buying into Chinese equities markets through ETFs have generated very different returns based on the quantity of A-shares, H-shares or other varities of Chinese shares they hold, reports Kate Beioley for the Financial Times.

Over the long-term, the MSCI China Index, which serves as the underlying index for the iShares MSCI China ETF (NASDAQ: MCHI). has been the best performing of the major benchmarks, beating out peers like the FTSE China A50, Hang Seng China Enterprises and MSCI China A indices.

MCHI's underlying MSCI China Index covers 85% of the Chinese stocks listed on foreign exchanges, which excludes Chinese A-shares or shares traded on mainland exchanges, and is comprised of 152 large- and mid-cap company stocks, including major internet names like Tencent and Alibaba.

Over the past decade, the MSCI China Index has generated a total return of 135.8%, with the technology segment, which makes up more than 40% of the index, accounting for a major portion of the total return. Over the past year, MCHI increased 47.1%.

MCHI includes a 41.7% tilt toward technology names, including Tencent 19.1% and Alibaba 12.4%, followed by a 23.5% position in financials and 9.2% consumer discretionary.

In contrast, many of the other China-related ETFs have a large overweight allocated toward the financial sector, which includes a large number of state-owned names.

“Most fund managers investing in China are wary of financials, and in particular the big banks, because you just don’t know what you’ve got — they’re so opaque,” Darius McDermott, managing director at Chelsea Financial Services, told the Financial Times.

However, investors have enjoyed a good run in Chinese A-shares names as these shares outperformed H-shares over shorter time periods. Over the past five years, FTSE China A50, which includes the largest 50 Chinese domestic stocks and acts as the underlying index for the CSOP FTSE China A50 ETF (NYSEArca: AFTY), was the best performing index.

Additionally, the CSI 300, which is the underlying benchmark for the Xtrackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR) and the VanEck Vectors ChinaAMC CSI 300 ETF (NYSEArca: PEK), has also performed well over the past five years. This index is comprised of A-shares with a higher weight toward tech names as well.

“China is a rollercoaster ride and impossible to time,” Shaun Port, chief investment officer at Nutmeg, told FT. “The determining factor of which index has done best has been which have the greatest exposure to technology stocks [which have rallied strongly in recent years].”

For more information on the Chinese markets, visit our China category.

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