A-share ETFs feel the strain
Investors are exiting the physically backed funds that give access to mainland shares in favour of synthetic funds, but don't let that scare you off
Something is afoot with the mainland's physically backed A-share funds. The instruments were the big innovation of 2012. They promised Hong Kong investors cheap, transparent access to mainland shares.
However, these funds are experiencing redemptions this year that cannot be simply explained by weakness in the market. Investors are exiting physical funds at a greater rate than they are leaving so-called synthetic funds, which are backed by derivatives (see graph).
One of the funds, the E Fund CSI 100, has seen a 70 per cent decline in the number of units held by investors, translating into US$1 billion of redemptions. Investors might wonder if the redemptions are any reflection of the quality of the physically backed A-share ETFs. The question is relevant given that a batch of new physical A-share ETFs are coming to Hong Kong, including one that starts trading today, called the C-Shares CSI 300.
The physical funds offered investors a simpler, derivatives-free way to buy A-shares, and one that was cheaper to boot. Investors pay total expenses of about 0.88 per cent for the Harvest MSCI China A, a physical fund, whereas the W.I.S.E. - CSI 300, a synthetic instrument, carries total expenses of 1.39 per cent.
Moreover, the synthetic funds involve derivative charges known as collateral costs that are not directly disclosed, and can run up to 2 per cent per annum. In the ETF world, which is all about giving investors cheap access to markets, that's a big difference.