Thursday, March 15, 2007

Comparison of two China A-share ETFs

As of today there are two ETFs with pure focus on China A-share market. They are Morgan Stanley China A Share Fund (CAF) and iShares FTSE/Xinhua A50 China Tracker (IFXAF.PK or 2823.HK).

Below is a comparison of these 2 ETFs and my personal preference based on the latest development of Chinese government policy.

Listing Location

CAF is US listed denominated in US$, iShares FTSE/Xinhua A50 China Tracker is HK listed denominated in HK$ (2823.HK) and traded as pink sheet in US (IFXAF.PK).

Index Fund/ Actively Managed Fund

IFXAF is a passive index tracking fund, the Fund's objective is to track the performance of the FTSE/Xinhua China A50 Index. The Fund invests in Chinese A-Shares Access Product (CAAPs) issued by a connected person of QFII as underlying investments.

CAF is actively managed and invest directly in Chinese A-share with its allocated QFII (Qualified Foreign Institutional Investor) quota, its fund manager is supposed to exercise his strategy to pick stocks to beat the index.

Fund NAV (as of 14 March 2007)

IFXAF: HK$18.1B (or US$2.3B)

CAF: US$421M

Top 10 Holdings (as of latest report)


Out of its top-10, 19% of the fund is invested in bank/finance sector.


Out of its top-10, 28.2% of the fund is invested in bank/finance sector.

Sector Breakdown



We can see that CAF overweighted industrial sector while the A50 index is more banking and finance biased.

Discount/Premium (as of last closing)

IFXAF: 7.16% discount to NAV

CAF: 12.44% discount to NAV

Most recent discount/premium can be checked from the following sites:



After reading all the factual information, here is my further analysis based on the current Chinese political and economical situation.

I am very bullish towards China’s general economic and stock market growth, at least towards the end of 2008 when the first Olympics is being hosted by China. ‘Face’ is one of the main reasons why China would support the market till then. Secondly, the CSRC (China Securities Regulatory Commission) has already announced the plan to accept HK listed Red Chips to return home and list as A-share in Shanghai Stock Exchange. In fact according to news source from China, China Mobile (CHL) has already submitted such application this week. This is in addition to the H-share return home which has already started and will see more on an ongoing basis. China Life (CHL) is one of the H-share just returned home recently.

What is the implication of the ‘return home’ of Hong Kong listed Chinese stocks? As in any market index, the criteria of selecting constituent stocks is to pick the most representative companies in each sector with high trading liquidity. In the past there are very few such companies listed in Shanghai/Shenzhen, not because those companies didn’t exist, rather they have chosen to list overseas (mainly in Hong Kong) because of the previously underdeveloped stock market in China. Now those return home companies will undeniably become a strong catalyst to the Chinese stock market because investors are more willing to re-allocate their money from low interest saving accounts to stock market now filled with profitable industry leading giants.

At the same time those original A-50 smaller constituents less profitable companies will be kicked out from the index. This process will go on until there are no more companies need to be reshuffled from the index, this will take at least a few years and this is exactly a period during which the A-50 will experience the highest growth rate.

So the next question is whether CAF can beat the A-50 index?

Previosly I don’t have preference among the two, until CAF disclosed its full portfolio recently. I reviewed the latest CAF annual report and its full portfolio. I am not too pleased with what I see.

CAF has invested around 5% of its money into 11 funds (including the iShare A-50 fund!). I really cannot understand the reason for doing so when there are a whole lot of available alternative companies in the Chinese market. So practically 5% of CAF is a Fund of Funds. This raised a question whether the CAF manager has really tried his best effort to increase the return, may be a sign of agency problem. Though 5% of the NAV is not a significant amount, I always believe minor issue can help us uncover bigger truth.

CAF investment in other Funds

There are a lot of research papers which show most active funds cannot beat the index, unless there are strong evidences to convince me an actively managed fund is better than the comparable index fund, I would rather play safe, especially in this case the A-50 index is so rosy. I am in favor of iShares FTSE/Xinhua A50 China Tracker (IFXAF.PK or 2823.HK).

Disclosure of interest: I have a LONG position in 2823.HK


Anonymous said...

just a pity the Finance sector is too much the portfolio proportion, their valuation are really not cheap.

Btw, you black background is really hard for eyes.

Zhong Siwei 鍾思維 said...

when more H and red chips go back to list as A, % of constituent finance stocks will be reduced, expect to see china mobile, petro china etc in the A-50 index. by then i forsee a healthier growth in the index and that moment will not be too distant away..

Anonymous said...


I was thinking about purchasing the HK iShare ETF and figure I would do some research then I found your site. Looks like you just started it not long ago? I read the articles and they are very good (especially this one on the ETFs of course).
Thanks for sharing your thoughts.
Hope it works out well and keep up the good work!


Zhong Siwei 鍾思維 said...

Yes, my blog is just a few months old. Hope it is useful to all of you

Anonymous said...

Potentially foolish question here: The listed prices for IFXAF seem to lag considerably on a lot of websites--today's prices (04/30) list the last trade as 04/24. The same goes for online platforms like etrade.

What explains this? I can't believe no one in the U.S. is trading this ETF. Are there difficulties in getting ideal prices or selling in a hurry?

Thanks in advance for any guidance you may provide.


Zhong Siwei 鍾思維 said...

IFXAF is trading as 'pink sheet' in US, which is a very light volume OTC trade with no market maker. If you really want to trade it you may want to trade 2823.HK which is listed on HK Stock Exchange. I know ETrade is providing HK stock trading service to US investors. Otherwise if you interest is to have add exposure to Chinese A share to your portfolio, CAF is still not a bad choice in view of lack of alternatives.

Unknown said...

I love your articles, they are brilliant!
What do you think of the H share ETFs? 2828 HK and 2838 HK? I think they are safer than A share ETFs for long-term.

Zhong Siwei 鍾思維 said...

Hi Lara,

I will write another story comparing H/A/Red chip index based ETF.

keep tuned !


Anonymous said...

Great article!

One question on the "return home" topic. You seem to imply that when some profitable firms return home and kick smaller firms out of the A50, the IFXAF/2823 will experience growth:

Quote: At the same time those original A-50 smaller constituents less profitable companies will be kicked out from the index. This process will go on until there are no more companies need to be reshuffled from the index, this will take at least a few years and this is exactly a period during which the A-50 will experience the highest growth rate.

Why do you think so? The IFXAF/2823 are just ETF index trackers so if a new entrant enters, it will have to sell its position on the kicked out firm and buy the new firm's securities (at whatever its price). So return home will have no immediate material impact on the price of the ETF, right?

If you are assessing that the long term growth potential for these new entrants is better, then I would agree.

Also, as a US based investor, my options are CAF, FXI and IFXAF. IFXAF has tiny liquidity and CAF seems to be the only A share non-CAAP QFII fund. What do you think between FXI and CAF?

Will ETFs like FXI not also get a potential one-time gain if CDR's come into existence to arbitrage the A-H gap away?


Zhong Siwei 鍾思維 said...

Hi James,

1) Yes, that's what I meant. When better quality H returns to A the overall profit earning power of the A-50 constituents will become stronger and hence my veiw is that A-50 will have a even better future in long run.

2) about ETFs like FXI which can only invest in HK stocks, first of all i dont think there is a big 'step jump' when CDR is introduced, because i believe government will adopt a phrased and slow approach (like the RMB appreciation process in place now), and such CDR arrangement will not be granted to all companies in 1 go. Most likely those with small spread will be let go first so that the arbritage effect is manageable. FXI still is not a bad choice, but the expected return i beleive would be lower than CAF or A-50. Have u read my new article comparing 3 H/Red chip based index ETF? I've a chart comparing CAF, A-50 with those H share index fund. You can see the big gap. I've not done any reserach on FXI, you can easilty plot a similar chart to compare the trend.

Hope this helps.

Anonymous said...

Thank you for the response!

I have read the 3 HK funds comparison.

I would like to follow up about FXI (H shares fund) vs CAF (or other HK A Shares fund). I believe FXI is a better value buy right now because:

1) if there really is an A share bubble, then A funds will get hit harder when it bursts.
2) H shares are rising much slower than their A share counterparts (Shanghai index up 40% but FXI hasn't moved much YTD). So down side to bubble burst is less.
3) if A to H arbitrage eventually happens, H downside risk is further reduced.

As a US based investor, I will not be able to easily buy HK shares until E*Trade Global Trading comes live:

But I still feel that FXI (H shares) is a better buy than buying A shares. The gap between it and A gives it up side, and the gap also limits its downside).

Of course, the A50 2823 doesn't neccessarily equal the Shanghai index (mainland A share bubble) that I alude to above. So I believe your argument for A50 growth is correct. If I were based in HK and I wanted to cover the market (HK+China), I would put half in an index covering all H shares and half in A share 2823.

I can't wait until E*Trade gets going. It makes me made to pay funds like CAF that manage away the currency risk. The whole point of investing oversears for me is to diversify to other economic factors, yet they charge you to erase the currency fluctuations. ETFs all the way!


Anonymous said...

Hi, Siwei,

Great articles! I learnt a lot from them.

One question: how do I buy IFXAF? I don't see any bid and ask price during the trading day, yet see some volume at the end of the day. Don't know how did this volume get generated? I can place a trade through my broker, say Fidelity by setting an order, say, 100sh at $19, but I don't know if this is gonna be executed. Can I place a market order? Thanks for your insight!


Zhong Siwei 鍾思維 said...

Hi Jim,

IFXAF trades as OTC pink sheet with very low volume, you may need to open a HK stock trading a/c to trade 2823.HK which is listed in HK. I heard E-trade is offering such service in US but i have no idea whether it is already available or not, you may want to check with them directly