ETF Talk: China A-Shares — You Can’t Always Get What You Want

The classic by the Rolling Stones, “You Can’t Always Get What You Want,” applies as much to the market as anything else — and who doesn’t want a taste of forbidden fruit when the opportunity arises? Once again, loyal readers, we are looking to China to treat our portfolios with sweet potential.

As I wrote last week, there is deep value in China for “blood in the ‘red’ streets,” if investors are willing to follow in the footsteps of Baron Rothschild and take a contrarian position while others flee. So, let’s have a look at the fruit — a fund that can get your teeth into China’s local economy, iShares MSCI China A ETF (CNYA).

This exchange-traded fund (ETF) tracks the investment results of an index composed of domestic Chinese equities that trade on the Shanghai (SSE) or Shenzhen Stock Exchange (SZSE). Through this ETF, investors can gain exposure to the locally listed portion of the Chinese stock market that is denominated in the local currency, while minimizing risks associated with investing in China’s domestic market.

In other words, CNYA provides access to large- and mid-cap stocks from the Chinese A-shares market, which has historically been largely inaccessible to international investors due to government restrictions on foreign investment.

The fund has a total of 520 holdings and net assets of $182.16 million. Top sectors in the fund are Financial Services at 20.14%, Industrials, 16.11%, Consumer Defensive, 14.26% and Technology, 13.18%. As of March 6, the fund is up 9.87% for past month, down 1.04% for three months and up 0.58% for the year to date. It has an expense ratio of 0.60% and a satisfying dividend yield of 4.19%.

Courtesy of stockcharts.com.

Its top 10 holdings are heavily weighted toward Consumer Staples and Financials. They are: Kweichow Moutai Co., Ltd. Class A (600519.SS), 5.69%; Contemporary Amperex Technology Co., Limited Class A (300750.SZ), 1.91%; China Merchants Bank Co., Ltd. Class A (600036.SS), 1.76%; China Yangtze Power Co., Ltd. Class A (600900.SS), 1.69%; Wuliangye Yibin Co., Ltd. Class A (000858.SZ), 1.49%; Ping An Insurance (Group) Company of China, Ltd. Class A (601318.SS), 1.24%; Agricultural Bank of China Limited Class A (601288.SS), 0.99%; Shenzhen Mindray Bio-Medical Electronics Co., Ltd. Class A (300760.SZ), 0.95%; Industrial Bank Co., Ltd. Class A (601166.SS), 0.92% and Industrial and Commercial Bank of China Limited Class A (601398.SS), 0.91%.

It is notable that the top two holdings are in consumer goods and automotive companies — two of the sectors anticipated to play a significant role in buoying the dragging economy. Alongside talk of tax policies to incentivize consumer spending, potential further reserve ratio cuts suggested at the National People’s Congress meeting on Tuesday by the governor of the People’s Bank of China have made the risk/reward there more attractive.

But before taking that proverbial leap into becoming enamored by this week’s fund, let’s step back for a reality check. Earlier this year, I discussed the rout in the Chinese stock market in my Eagle Eye Opener and what I’d want to see before allocating exposure to China: reserve ratio cuts and more business-friendly rhetoric and practices from China’s government.

In late January, Chinese authorities announced a 50-basis-point reduction to reserve requirement ratios, and this past Tuesday’s annual meeting of the National People’s Congress revealed an economic growth target of around 5% with an announcement to provide moderate economic stimulus to boost domestic consumption. The stimulus offers incentives to buy new vehicles and household appliances, industrials, as well as support for clean energy and the development of scientific and technological innovation in areas such as artificial intelligence (AI).

So, what does all this mean, and where does the forbidden fruit come in?

The anticipated slowdown in Chinese exports and the reported policy talk around boosting personal consumption, creating jobs and supporting innovation suggests a focus on picking up the dragging domestic economy in the world’s most populous nation. China undoubtedly is a difficult market to access for foreign investors, and one that could prove to be worthwhile for those looking for value and a contrarian opportunity.

So, if you are tempted by the exotic fruit of a “forbidden” market and want to get in now to take advantage of growth down the line, this ETF may well satisfy your hunger.

While this fund has outperformed others focused on China A-shares, there is always regulatory risk and volatility to consider when investing in China’s domestic market. Investors should always do their due diligence before adding any stock, fund or ETF to their portfolio.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to email me. You may see your question answered in a future ETF Talk.