Physical ETFs are cheaper and more transparent

This is a story about exchange traded funds (ETFs). But before you flee the Money pages, fearing a jargon-filled article that knocks you out with technicalities, please hang on and consider a few facts.

First, at some point you have probably thought about A-shares, which are yuan-denominated, mainland-listed equities. That might be less the case these days - the market is dreadful - but at some point you would have considered the shares, which are the best way to invest in China's growth story, the biggest economic boom in contemporary times.

If you have thought about A-shares, then you have surely looked at ETFs, as the instrument is effectively the only way that Hongkongers can get into this market.

The A-share ETF market is large. There are about HK$175 billion of such funds listed in Hong Kong, with most of that money in A-shares. The iShares FTSE A50 China Index, the biggest Hong Kong ETF, trades at more than twice the volume of Cheung Kong shares in terms of dollar amount, just for reference.

And here we come to our point. In recent months three mainland asset managers have launched a new kind of ETF that offers cheaper access to A-shares. How much cheaper? About 2 per cent to 3 per cent in terms of annuals costs, which is significant. Any fund manager would be proud to offer an immediate 3 per cent annual gain.

There are two types of ETFs that invest in A-shares. The new funds invest directly into the shares - they physically own the securities and are therefore called "physical" ETFs. The second type replicates A-share returns with derivatives. These funds are called "synthetic".

The new, physical, funds are simpler and more transparent than the synthetic ETFs. They are also free of back-tax risk.