MarketsMuse.com ETF update profiles a less than tasty example of how not to select certain offerings from the menu of China ETF products with a snapshot of a seemingly sour taste investors might be left with after consuming Blackrock’s iShares FTSE A50 China Index (HKG: 2823). Below extract is courtesy of reporting by Bloomberg LP’s Elena Popina and Boris Korby “The 80% BlackRock ETF Return That Shortchanged China Stock Bulls.”
The $9.1 billion iShares FTSE A50 China Index ETF, an exchange-traded fund designed to track returns of the 50 largest companies traded in Shanghai and Shenzhen, has underperformed its benchmark by a whopping 29 percentage points on a total return basis over that span.
The cost to investors? More than $900 million in unrealized gains, according to data compiled by Bloomberg.
ETFs such as BlackRock’s, which popularized the use of complex derivatives as a way for foreigners to tap into China’s growth potential, are now becoming unintended casualties as the nation opens up its capital markets. As more foreigners gain direct access to yuan-denominated A shares on mainland bourses, demand for the derivatives has plunged. That’s unmoored the ETFs from their benchmarks and robbed investors of returns.
“It’s not providing what it advertised to do,” Ajay Mehra, the head of equities at Salient Partners LP, which oversees $27 billion, including FTSE A50 China Index ETF shares, said by phone from New York. “This tracking error has led to substantial underperformance over the past year, which makes it less attractive as an access vehicle.”
Discount Widens
Started in 2004, the iShares A50 ETF was the first to use derivatives instruments to offer overseas investors exposure to mainland stocks market, which were virtually off-limits to foreigners at the time. Its assets ballooned, helping the fund to become the largest of its kind.
For investors in the ETF, things started to unravel last year. That’s when China announced in November that it would link the Shanghai stock exchange to Hong Kong’s and allow 23.5 billion yuan ($3.8 billion) of cross-border trades each day.
The move came three years after China took a major step to open its capital markets with a program known as RQFII.
Before the November announcement, the iShares A50 ETF consistently traded at a premium to its underlying exposure, resulting in a market capitalization higher than its net asset value. Since then, a discount has emerged and widened to 11.5 percent last week, data compiled by Bloomberg show. That’s the most since 2007. It was 8.7 percent on Monday, when investors pulled the equivalent of $462 million from the fund, the biggest outflow since July 2009.
“We have observed that the opening of the Shanghai-Hong Kong stock connect has contributed to pricing dislocations across financial instruments connected with accessing China, including our A50 ETF,” Melissa Garville, a spokeswoman for BlackRock in New York, said in an e-mail.
BlackRock’s not the only one affected. The $1.1 billion Wise – CSI 300 China Tracker, an eight-year-old derivative-based ETF issued by BOCI-Prudential Asset Management Ltd., fell to a record 11.1 percent discount to its net asset value Monday. And the $926 million closed-end Morgan Stanley China A Share Fund, created in 2006, is trading at a discount of almost 20 percent, the widest since 2008.
“Who needs a derivative with some bank when you can go buy stocks directly?” Eric Balchunas, a Bloomberg Intelligence analyst, said by phone. “There’s no market anymore” for those ETFs.
For the entire story from Bloomberg LP, please click here