Actually, I struggle to decide the title of this post. In fact, at one point I believe the more appropriate title will be “Will China long funds disappear like penguins?” However, I decide to send a more positive message to my readers, so hopefully this title will light up my readers’ interest in investing China equities…
In case my readers are not aware of, one of the latest trend in the Hong Kong market is the rise of sector ETFs. You see, products such as China A-50 (2823 hk) and Tracker fund (2800 hk) have been in the market for quite sometime, but it’s not until now that there are more specific China ETFs available in the market. This is one of the most exciting developments in the Greater China equities market, as investors have options to maximize their return.
Claymore has been the pioneer in terms of product offerings for Chinese equities market. Although Claymore cannot really break into the A-share market, it is combining the best of the Hong Kong, US and Singapore listed Chinese stocks to form specific ETFs. Performance of its ETF has been stellar. For example, in 2009 return of Claymore’s China small cap ETF (HAO US Equity) was 98% and perform better than the majority of long funds (I heard from market rumor that top 10 percentile fund performance, including long only and hedge funds, is about 90%). Probably having seen the success of HAO (In Chinese, hao means good), this year Claymore has launched 2 additional sector funds: A real estate and a technology ETF. So it’s actually pretty straight forward, like real estate will be investing stocks like CR Land, COLI, Shimao, Sino-Ocean and then technology fund is investing in stocks like Tencent and Baidu. These ETFs become good options if investor want to bet against specific sectors of the market, especially given the huge volatility among different sectors (say real estate was so beaten down by government policy and I would like to bet for the upturn), it opens up the option for investors to buy selectively in the China market. Also as a buy-side analyst, for me buying these ETFs allow me to participate in a more tactical way without violating most compliance rules. So, I am not just recommending this to retail investors in general but this works even for finance professional.
Another new set of ETFs launched by Deutsche Bank is about the A-Share sector ETFs. There was no way I could bet against specific sectors in the A-Share market for foreign investors until the launch of this product. Now if I want to, I can buy say healthcare sector ETF (3057 HK) in the midst of the healthcare sector rally based on the huge investment government makes to the healthcare sector. Note that although investors do not actually own the A-share healthcare stocks (in a sense this is a swap based investment), you can access the investment opportunity that is available in the market rather than just simply moving along with the whole market. And, almost at the same time, iShares launched 4 sector ETFs as well, including sectors for financial, infrastructure, energy and materials, all mimicking performance of the CSI 300 specific sector performance.
Still not enough? Well, consider this newly launched ETF by DaChen Asset Management just a couple of days ago (3071 HK), which has a specific focus on A-share consumer stocks. I haven’t checked the holdings yet, but this could be the ETFs the buy, given everybody is quite well known the consumption growth story in China and this is the sector currently most supported by the government as China intends to build around a big, strong middle class.
To me, the rise of China ETFs should send a big warning signal to long-only funds. I mean, there is no reason to invest in most funds if given HAO can produce a whopping 98% of the return. I simply do not understand the rationale to invest in long funds is I can get even better returns in investing ETFs. I mean, in Hong Kong it’s still easy enough to open an etrade account and trades US stocks. I also do not understand why the HK fund managers are still so arrogant these days, when they do not realize that the ETFs are seriously challenging their once lucrative and promising careers.
My last piece of advice is to bet the beaten up real estate and materials sector in China. If, you believe the market will trun around soon (given not much downside and overly pessimistic sentiment in Mainland), why not giving these way oversold sector ETFs a good try and instead those arrogant, ignorant fund managers who do not even realize there are these ETFs available in the market?
I believe some of my wordings are a little too harsh on this writeup, but just want to comment honestly about what’s really going on in the market. Yes, I do worry about my job prospect in the long run as these ETFs keep coming out of nowhere.