In November 2013, Deutsche Asset & Wealth Management, part of Deutsche Bank Group (NYSE:DB) launched the first ETF listed on NYSE Arca that directly invests in A-shares of Chinese companies, which are traded in Shanghai and Shenzhen. The A-shares market has for many years been off limits to foreigners, but the Chinese government have gradually eased those restrictions. Deutsche has been able to offer this product by partnering with Harvest Group Investments Limited, which holds a Renminbi Qualified Foreign Institutional Investor (RQFII) status in China, and that allows the fund to purchase domestically traded A-shares, subject to its RQFII quota. Despite the easing of restrictions, foreign ownership in the A-shares market remains very low.
The db X-trackers Harvest CSI 300 China A-Shares Fund (NYSEARCA:ASHR) seeks to track the performance of the CSI 300 Index, which is constructed from the 300 largest and most liquid stocks listed in Shanghai and Shenzhen. The CSI 300 Index declined by 7.6% in 2013, on concerns of increasing level of bad loans and policy reforms. Currently, companies with dual A- and H-share listings typically trade with a 5% discount on the A-share market, as foreign investors are less pessimistic on China's prospects. Given those concerns, the CSI 300 Index trades at a modest 11.5 times earnings. Another benefit of investing directly into the A-share market is that it will most likely be less affected by the reversal of global money flows from Hong Kong, as the Fed tapers its asset purchases.
Most ETFs listed in the U.S. which offer indirect exposure to Chinese equities by holding H-shares of Chinese companies listed on the Hong Kong Stock Exchange, and ADRs of mainly technology companies listed in the U.S. Market Vectors China ETF (NYSEARCA:PEK) previously offered exposure to China's A-share market through CSI 300 Index swaps, a financial derivative; but it has recently announced that it also intends to directly invest in the A-share market through its with a subsidiary of China Asset Management Co. Ltd., which also holds a RQFII quota. Its ETF offers a somewhat lower net expense ratio of 0.72%, compared to ASHR's expense ratio of 1.08%. However, Deutsche's ASHR ETF benefits from greater liquidity, as it is significantly larger, with net assets above $210 million, compared to PEK, which is just over $28 million.
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