Deutsche Asset Management yesterday listed the first Ucits exchange-traded fund in Europe to capture the price differential between Chinese stocks listed both in Hong Kong (H-shares) and the mainland (A-shares).
The ETF references the new FTSE China A-H 50 Index, which tracks the largest 50 A-share companies by market capitalisation but buys whichever is the cheaper of the A- and H-share classes. The selection process will take place at each quarterly review. For companies with only an A-share listing, the A-shares will be selected for index inclusion.
"This ETF is first of all for investors that expect the largest Chinese companies to have positive performance," said Marco Montanari, Asia-Pacific head of passive asset management at Deutsche AM. "Secondly it can be used by investors who believe that H- and A-shares will ultimately converge [and will therefore benefit from having held the cheaper stocks]."
Dual-listed China stocks often trade at different prices, even though the two types of shares enjoy the same voting rights and dividend payments. Yesterday H-shares on dual-listed stocks were trading at a 27% discount to their A-share equivalents.
The db x-trackers Harvest FTSE China A-H 50 Index Ucits ETF is listed on the London Stock Exchange and Deutsche Börse and managed by Harvest Global Investments, the international arm of China’s Harvest Fund Management. The annual all-in fee for this physically replicated product is 0.65%.
The fund also applies a screen to reduce index turnover. Once selected, the relevant share classes are weighted by their respective A-share investable market capitalisation (after free-float restrictions) at each quarterly review.
Montanari conceded that it was far easier for foreign investors to buy A-shares directly now than in the past, thanks to cross-border schemes such as the Shanghai-Hong Kong Stock Connect. But he said products such as the new ETF offered simplified exposure to the cheapest A- or H-shares rebalanced on a quarterly basis.
He added that the pricing differential between the two markets may relate to factors such as mainland capital-control measures and differences in the investor base. In the long run the price differential may close as China’s capital markets open up, he noted, which would benefit investors that have automatically had exposure to the lower-priced share classes.