Active transparent ETFs cost only slightly more than passive trackers
Chinese equities in recent years have seen big winners and losers for reasons often related to politics and regulation. For many years, the mega-cap tech BAT complex (Baidu, Alibaba, Tencent) had performed very well, until a regulatory crackdown on sectors including technology. Then when Covid came along, the strict Chinese lockdown rules created new winners – such as food delivery – and losers – such as restaurants. It remains to be seen if these dynamics reverse now that China has lifted restrictions.
Therefore, the market would appear to be ripe for sector and stock-pickers to add value. Investors who are confident in picking winning sectors can choose from a growing range of sector-focused China ETFs, such as Invesco China Technology ETF (CQQQ); KraneShares MSCI All China Health Care Index ETF (KURE); Krane Shares MSCI China Clean Technology Index ETF (KGRN); Global X MSCI China Consumer Staples ETF (CHIS) or Global X MSCI China Financials ETF (CHIX).
Investors who would rather be exposed to a range of sectors and let active managers pick and trade stocks could go for an active ETF.
The JPM ETF launched this month – JP Morgan Active China ETF (JCHI) does not currently disclose past performance because it is a new one with less than one year of track record. However, investors might want to research the track records of the two portfolio managers, Li Tan and Rebecca Jiang, who are both based in Hong Kong. For instance, Citywire ranks Rebecca Jiang as 29/89 managers over the past year, for the JP Morgan SAR Greater China A fund
However, this fund may not have exactly the same mandate as the ETF: the ETF investment universe includes Mainland China, Hong Kong, Taiwan and Macau. Moreover, this is clearly not a one or two person band: JP Morgan has a large Greater China team of 26 investment professionals who can feed ideas into the fund.
The top ten holdings contain some familiar mega cap names: tech conglomerate Tencent; e-commerce firm Alibaba, China Merchants Bank, Ping An Insurance, spirits maker Moutai and gamer Netease.
They also contain some less well known mid caps, such as gas pipeline operator ENN energy holdings, and home appliances group Haier Smart Home. Looking down the full list of 54 holdings, there is also the world’s third largest yeast maker, Angel Yeast and Aier Eye Hospital Group.
Some 44 Chinese companies deemed to be “Communist Chinese Military Companies” are subject to US sanctions restricting investment, and, unsurprisingly, we did not notice any of them on the list. In these times of geopolitical tensions between the US and China, the prospectus does contain a paragraph flagging up the risk of [other and further] sanctions and active managers who are plugged into local politics might arguably be in a better position to navigate any geopolitical hiccups or worse.
The fees of 0.65% are a little lower than two other active China ETFs: Rayliant Quantamental China ETF (RAYC) charging 0.80% and Matthews China Active ETF (MCH) charging 0.79%. Both of them are also transparent, disclosing holdings on a daily basis.
Passive China ETFs such as iShares MSCI China ETF (MCHI) are only slightly cheaper at 0.59%, and clearly cost a lot more than some developed market equity index ETFs. Therefore, the bar for an active ETF to add value in Chinese equities would appear to be lower than is the case for developed markets: if the managers can generate even quite small amounts of alpha, most of it should contribute towards outperforming the currently available passive China ETFs.