iShares’ new China ETF expected to struggle for flows

Jan 25, 2016

iShares will launch its new MSCI-linked A-share exchange-traded fund at a time of negative sentiment on Chinese equities and into an already crowded space.

iShares’ new China ETF expected to struggle for flows

BlackRock's iShares business will list a new A-share exchange-traded fund in Hong Kong this Thursday (January 28) amid negative sentiment on Chinese stocks and doubts that another such product is really needed.

The iShares MSCI China A International Index ETF will track the performance of the MSCI China A International Index, which comprises some 400 large- and mid-cap A-shares listed in Shenzhen and Shanghai.

Jessica Cutrera, managing director of Hong Kong-based wealth advisory firm EXS Capital, is not sure whether another China ETF will be welcomed. “There are already a lot of options for A-shares in Hong Kong and the US," she noted.

Cutrera, a regular user of ETFs for client portfolios, was skeptical that the fund would achieve high enough volumes to attract institutions and asset managers. Investors can now also access A-shares via the Shanghai-Hong Kong Stock Connect, though admittedly under quota limitations.

“However," Cutrera noted, "it may be attractive if investors start to believe China has bottomed out.”

Stewart Aldcroft, Hong Kong-based senior adviser at Citi Global Transaction Services, made a similar point, telling AsianInvestor: “The timing of the launch is a bit unfortunate, unless they are trying to catch the bottom of the market.”

Susan Chan, Asia-Pacific head of iShares, conceded that the ETF was unlikely to be a best-seller from the outset: “Right now, China is a sell for most managers, but we took a view that we needed a physical ETF in this market, so this launch is about long-term positioning. It will start small and once the market sentiment improves, we expect it will pick up.”

It may help that the new physically replicated iShares ETF will have a 60-basis-point (bp) transaction fee, which is at the lower end of the price range for similar types of ETF. Once the management fee and transactional costs are taken into account, the total expense ratio (TER) would be 65bp, said a spokesman in Hong Kong.

Here is a list of competitor physical ETFs, along with their TERs:

Lyxor MSCI China A Fortune SG Ucits ETF – 65bp
DB Harvest CSI 300 China A-Shares Fund – 80bp
GFI MSCI China A International ETF – 80 bp
China AMC CSI 300 IDX ETF – 83bp
CSOP FTSE China A50 ETF – 108bp

Meanwhile, the iShares launch reflects the importance to BlackRock of having a China product developed in association with MSCI, still the most widely used index provider globally, and the one the industry expects will soon include A-shares in its emerging market indices.

At the time of its last index constituent review in June 2015, MSCI said it was in discussion with the China Securities Regulatory Commission regarding inclusion of A-shares in the relevant MSCI indices, but without setting a timeline. MSCI’s Asia-Pacific head, Chris Ryan, said at the time he expected some form of A-share inclusion by 2017.

iShares already has two synthetic ETFs linked to other A-share indices – those tracking the FTSE A50 China Index and CSI 300. It also has a physically replicated MSCI China Index ETF that invests in H-shares.