FXI iShares China Large Cap

After offering CSI Five Year Plan ETF (KFYP) and CSI China Internet ETF (KWEB) last August, China-focused issuer KraneShares is all set to introduce another China-centric ETF. The new fund –KraneShares Bosera MSCI China A ETF under the symbol of KBA –was launched on March 5, 2014 (read: Forget FXI: Try These Three China ETFs Instead).

This time, KraneShares has joined with a local advisor, Bosera Asset Management, for direct entry into the mainland market via an initial renminbi qualified foreign institutional investor (RQFII) quota of 1 billion RMB ($163 million).

KBA in Focus

This passively managed ETF looks to track the MSCI China A Index which is a market capitalization weighted index designed to indentify the equity market performance of large-cap and mid-cap Chinese securities (“A Shares”).

A Shares are defined as the common stocks issued by companies based in mainland China and are traded in renminbi (‘‘RMB’’) on the Shenzhen or Shanghai Stock Exchanges (read: China A-Shares ETFs Explained).

The index is equally diversified across the capitalization spectrum with large, mid and small cap stocks, each accounting for 33.33% of the portfolio. The Fund might allocate up to 20% of its assets in investments that are excluded in the underlying index. KBA will charge an expense ratio of 1.10% (see more on ETFs in the Zacks ETF Center).

As of January 31, 2014, the underlying index was weighted heavily toward the financial services (32.47%) sector with considerable focus in industrials (16.42%) and consumer discretionary (12.6%) sectors. The index comprises about 462 securities.

Top holdings for the index included China Merchants Bank A (2.84%), China Minsheng bank (2.53%), and Ping an insurance (2.29%). Less than 20% of the index portfolio is in the top 10 securities, causing lesser concentration risk, especially considering that all of the companies in the index belong to pretty diverse sectors.

How could it fit in a portfolio?

This ETF could be appropriate for investors seeking a new way to play the high-flying financial, industrials and consumer discretionary segments of the world’s second largest economy. Though the recent indicators point toward the sluggishness specifically in these sectors, the recent dip might open up a buying opportunity thanks to long-term potential (read: China ETFs Struggle on Weak Data, Bailout Speculation).

Notably, despite a recent run of soft data and an emerging market lull on a potential acceleration in QE tapering, Chinese government targets a 7.5% growth rate in 2014. Even after considering the recent slowdown in China, the growth target seems pretty impressive compared to many developed nations.

ETF Competition

Initially, China A-Shares market was blocked to many foreign investors, but it is slowly beginning to open up. At present, there are a handful of ETFs in the Chinese A-shares market that can be accessed by global investors.

These are Market Vectors China ETF (PEK), PowerShares China A-Share Portfolio (CHNA) and the newly launched db X-trackers Harvest CSI 300 China A-Shares Fund (ASHR).

Among the set, PEK is the oldest and CHNA is the cheapest option (charging 50 bps in annual fees). The other two funds PEK and ASHR charge investors 72 and 82 bps in fees, respectively. In such a scenario, the newly launched KBA, looking to charge the highest at 1.10% in the Chinese equities ETF space, might face a tough time in garnering investors’ assets.

Also, one cannot ignore iShares China Large-Cap ETF (FXI) which is not based on China A-Shares market, but still influences the space having amassed about $5.5 billion in assets.  

Bottom Line

Given the out-of-favor status of the China ETFs, it may be difficult for this newcomer to gather assets in the initial phase. Investors should note that most of the China ETFs (except some small-caps and technology funds) have shed in the range of 0.60% to 11.83% in the year-to-date frame (as of March 4, 2014).

Having said this, we would like to remind investors that the long-term outlook of the nation appears promising. The government seems poised to remove its structural bottlenecks with a slew of financial as well as demographic reforms which also include an easing of the country’s infamous one-child policy (read: China ETFs Jump on Government Reform Afterglow).

In fact, the fund launched on Chinese five-year plan – KFYP – held up pretty well this year amid the broader market slump, adding about 3.40% in 2014. Thus, though KBA might not be a winner in the near term, it could be an intriguing option for long-term investors.

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DB-HRVST CSI300 (ASHR): ETF Research Reports
 
PWRSH-CHA A-S P (CHNA): ETF Research Reports
 
ISHARS-CHINA LC (FXI): ETF Research Reports
 
KRANS-C CHN 5YP (KFYP): ETF Research Reports
 
KRANS-C CHN INT (KWEB): ETF Research Reports
 
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