The Motley Fool

Which China A-Shares ETF is for You?

Stock picking is a crucial part of value investing. At times, however, passive investments – such as exchange-traded funds (ETFs) – can also play a useful role in our portfolio.

This is the case when investors see long-term potential in mainland Chinese equities but have limited knowledge of individual Chinese stocks and when accessing them can be inconvenient. Generally, buying China A-shares can be troublesome given the only route for international investors is through the Hong Kong Stock Connect. In these scenarios, an A-shares ETF could be the answer.

Physical and synthetic ETFs

There are currently over 50 Chinese equity ETFs trading on the Hong Kong Stock Exchange. In this article, though, I’ll look at two of the largest; CSOP A50 (SEHK:2822) and CAM CSI300 (SEHK:3188).

Both are “physical ETFs”, in that they replicate the performance of the benchmark index by actually owning the underlying assets. This is in contrast to “synthetic ETFs” which typically invest in derivatives for the same purpose but don’t actually own the underlying assets.

Physical ETFs have many advantages. The structure is straightforward and easy to understand, as they follow exactly the weightings of constituent stocks on the benchmark index. These ETFs will therefore closely track the performance of the benchmark without any time lag.

Owners of ETFs also have ownership rights to the underlying assets. The major drawback? Costs. These are usually higher than the synthetic sort. On the whole, for more conservative investors, a physical ETF is worth paying a bit more for.

Tracking different benchmarks and shares

First off, readers should be aware of what each of these ETFs tracks. The CSOP A50 tracks the MSCI China A50 Index, while the CAM CSI300 tracks the CSI300 Index.  That means any difference in performance between these two ETFs can be put down to the fundamentally contrasting nature of the two indices.

The MSCI China A50 covers the 50 companies with the largest market cap in the A-Share market. By contrast, the CSI300 covers a much wider scope. It includes 300 companies with the largest market cap and liquidity. Of the top 10 constituents of each index, seven are the same.

Meanwhile, the top three constituents of both indices are exactly the same; Ping An Insurance A (SHA:601318), Kweichow Moutai A (SHA:600519) and China Merchants Bank A (SHA:600036). Both indices can be considered top-heavy. For MSCI China A50, its top 10 constituents add up to 50.7% of its total weight, whereas for CSI300, it’s 27.8%.

What does all this mean? The two indices generally move in the same direction. The MSCI China A50 is driven by the performance of a few mega conglomerates but the CSI300 is more diversified. However, this doesn’t necessarily translate to less risk. Though the MSCI China A50 has a higher concentration statistically, all its constituents are solid blue chips which should mitigate (to some extent) the concentration risk.

Characteristics of the two ETFs

The two ETFs are similar in their market cap and liquidity, with both widely traded and generating daily turnover that exceeds hundreds of millions of dollars. The minimum investment level varies a lot though. For CSOP A50, the current price is HK$14.88 and the lot size is 200 shares. The minimum investment amount then is just HK$2,976 (excluding trading fees).

For CAM CSI300, however, at the current price of $44.85 and the same lot size of 200 shares, the minimum investment is $8,770 – about three times more than CSOP A50.

CSOP A50 has a more generous dividend policy too. Its dividend yield is around 2%, with two dividend distributions per year. On the other hand, CAM CSI300 offers less than a 1% dividend yield and this is distributed once a year.

Which China ETF wins out?

Overall, the two ETFs each have their own merits. Personally, I think investors who want exposure to a larger part of the A-share market can go for CAM CSI300, while investors who prioritise flexibility and the promise of a higher yield may find CSOP A50 more suitable for them.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Wendy So doesn’t own shares in any companies mentioned.