Invesco has gone against the tide of closures in niche China exposures with a new ETF targeting innovative companies listed on the ChiNext segment of the Shenzen Exchange.
The arrival of the Invesco ChiNext 50 UCITS ETF (CN50) in June comes at a challenging time for Sino equity funds, with 18 China ETFs delisting globally in Q1 and an additional five products from Global X and KraneShares shutting within the past week.
Looking to offer a unique angle to China’s much-anticipated recovery, CN50 physically replicates the ChiNext 50 Capped index, capturing the 50 largest and most liquid securities listed on the ChiNext segment.
Unlike headline China equity indices, CN50’s benchmark sidesteps real estate, energy, utilities and consumer sectors altogether in favour of a combined 90% allocation to tech, industrials, healthcare and financials.
Its top positions are awarded to the world’s largest electric vehicle battery manufacturer, CATL, Shenzen Mindray Bio-Medical Electronics and East Money Information.
“It is interesting to have an ETF offering access to stocks that are beyond the traditional large cap ones,” said Pacome Breton, head of portfolio management at JP Morgan-Nutmeg.
“It has the benefit to avoid typical large cap state owned typical utilities enterprises, real estate and other large financial institutions.”
However, despite ChiNext’s innovation focus meaning the average constituent spends triple the amount on research and development on a relative basis versus the CSI 300 index – at 6-7% versus 2% – its return profile has been far less auspicious.
In fact, the ChiNext index has returned around 33% since inception in June 2014, which means it has outperformed the MSCI China index but lagged the 64.7% gain made by the CSI 300 over the same period.
“The performance remains extremely volatile and not for every investors,” Breton added.
“It is an index that almost quadrupled in value between 2019 and 2021, though has now given back all gains since launch in 2014.”
Another warning sign for Invesco’s China innovators gambit will be how equivalent ETFs have fared in recent years.
For instance, the KraneShares ICBCCS SSE STAR Market 50 index UCITS ETF (KSTR) – which tracks the performance of the 50 largest companies listed on the SSE Science and Technology Innovation Board – has amassed little over $2m assets under management (AUM) and returned -57.7% since launch in May 2021.
On the other hand, CN50 has two trump cards to play against KSTR and other rivals.
First is the fact it is “priced competitively” versus other specialised China ETFs, with a total expense ratio (TER) of 0.49%, compared to 0.82% for KSTR.
Second is market timing. Though overseas investors remain cold on Chinese equities, there remains the hope that four years of price collapse must eventually come to an end, with glimmers of positive returns in H1.
“If you want to play on a revival of the Chinese economy in the next few years, it is surely an index and an ETF to follow. It remains a challenging path forward,” Breton concluded.
A second Donald Trump presidency, trade concerns, state oversight and monetary policy will all drive China equity returns through the rest of 2024. CN50’s success depends on a revival of investor sentiment towards the market.
