China A-share ETFs

For U.S. investors who want to capture the A-share market in China, Market Vectors creates A-share exposure via swaps—but that exposes the fund to counter party risk, in this case Credit Suisse. The ETF has very low volume and assets; it's hard to know if this is because of the product or the terrible performance in the Shanghai Composite. I lean toward the latter explanation because investors don't seem to mind complex products with added risk. I'm not buying the fund because the market is weak and not worth the potential counter party risk. If the A-share market were looking very strong, I might consider the fund against the risks, but even then I'd probably prefer a sector fund or individual H-shares. Market Vectors China ETF (PEK) There's a similar fund in Hong Kong, iShares CSI 300 A-Share Index ETF (2846). It uses derivatives to achieve the returns, in essence similar to swaps. iShares has some other A-shares funds, if you follow that link you can find them on their HK website, if you're interested.

One positive for these funds is the announcement stock market reforms in China. One risk was that the institutions issuing the derivatives would be unable to hedge underlying assets and end up with a situation such as with iShares India ETN (INP), which turned into a closed-end fund when they couldn't create new shares. It traded at a big premium during the bull market and that led to losses when the premium eroded during the bear market. With the market opening up a bit, at least this portion of the derivative risk is lessened.

Below is PEK versus the Shanghai Composite; then against the index it tracks, the CSI 300. It does a reasonable job of tracking the index, but as you can see, it differs slightly from the reported Composite number.

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