ashr – Scalper1

A New Chinese ETF Is Better For An Arbitrage Or Just To Be Long Mainland China

Summary I’ve often written on the emerging spread between China-listed and Hong Kong-listed shares. This spread can form the basis of an arbitrage, but present ETFs have some problems in providing such arbitrage. However, there’s a new China ETF which might be better both for such an arbitrage and even just for a simple long for those wanting mainland China exposure. I’ve sometimes written about the widening gulf between Chinese shares quoted in Hong Kong (H shares) and their equivalents quoted in China’s Shanghai/Shenzhen exchanges (A shares). The last time I wrote about it was in my article titled ” There’s A Measure Of Irony In Today’s China Rally .” This spread between what are effectively the exact same shares started in November 2014, which coincided with the inception of a large bubble in Chinese stocks (quoted in China). One can follow this irrational spread by checking the Hang Seng China AH Premium Index and seeing how in years prior the index hovered in the 90-110 area as it should, and only recently it shot as high as 140-145. This means a basket of equivalent A shares is trading 40-45% above what their Hong-Kong quoted counterparts are going for. ( Source : FT.com ) I’ve said that a way to take advantage of this situation would be to arbitrage it by selling short an index fund composed of A shares and buying an index fund composed of H shares. My candidates for this were the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEARCA: ASHR ) for the short leg and the iShares China Large-Cap ETF (NYSEARCA: FXI ) for the long leg of the arbitrage. However, I’ve always had to warn that this is a very imperfect arbitrage, because the funds don’t have the same holdings – they just have some overlap where it matters. As such, this trade could only be taken for short periods of time, as any tracking error can accumulate over time. There Might Be A Better Way There is a new kind on the Chinese ETF block. I am talking about the CSOP China CSI 300 A-H Dynamic ETF (NYSEARCA: HAHA ). This ETF has unique characteristics, as follows: It replicates the CSI 300 Index, which is made up of A shares. However – and this is a key difference – whenever there’s an equivalent H share, and the H share is trading cheaper than its A share counterpart, the ETF buys the H share instead. Also, the fund carries a 75 bps expense ratio. And it’s managed by CSOP, which is the largest China A ETF manager globally, based in Hong Kong and with offices in New York. Due to the unique way this ETF is managed, it presents a much better way to implement the arbitrage I once used ASHR and FXI for. Here, the arbitrage would need to be structured as follows: A long position on HAHA. Together with a short position on ASHR, which tracks the CSI 300. The tracking error of this solution would be much smaller than the previous version, and it should correlate much better with changes to the Hang Seng China AH Premium Index. Furthermore, this ETF will probably also constitute a better alternative for those simply wanting direct exposure to China’s A share market/CSI 300. After all, it will include all of the necessary components, while also including the cheaper H shares if those are available. Not All Is Roses, Though There are a couple of issues which need to also be taken into account: HAHA is still a very recent and mostly unknown ETF, so its liquidity is very low. Furthermore, low liquidity can lead to large bid-ask spreads, much larger than either FXI’s or ASHR’s. This can be somewhat mitigated if the proper market makers tighten them, but at present, it’s clearly a problem, as it increases trading costs. Also, holding an ASHR short position, while being cheaper now, is still somewhat expensive. This is how the short rebate fee has evolved recently – as you can see, it still costs nearly 6%/year to keep an open short position: (click to enlarge) ( Source : Interactive Brokers) Conclusion There is a case to be made for using HAHA for an arbitrage to capture the Chinese A-H share spread in an arbitrage position. There is also a case to be made for using HAHA just to get long exposure to the Chinese CSI 300 index. However, a couple of problems remain in both cases, namely the lack of liquidity and thus larger trading costs, and the cost of keeping an ASHR short position open.

ETF Update: An Unintended Focus On China A-Shares

Summary Every week, Seeking Alpha aggregates ETF updates in an effort to alert readers and contributors to changes in the market. There were 5 ETF launches over the last 2 weeks, with 3 of those launches focusing on China A-shares. Have a view on something that’s coming up or a new fund? Submit an article. Welcome back to the SA ETF Update. My goal is to keep Seeking Alpha readers up to date on the ETF universe and to gain some visibility, both for the ETF community, and for me as its editor (so users know who to approach with issues, article ideas, to become a contributor, etc.) Every weekend, or every other weekend (depending on the reader response and submission volumes), we will highlight fund launches and closures for the week, as well as any news items that could impact ETF investors. After the flood of launches 2 weeks ago, the last two weeks were low key in comparison. This was great for me as an editor a Seeking Alpha with Earnings Season in full swing, so I decided to combine this week and last week’s launches into one ETF Update post. Fund launches for the week of October 12, 2015 Fund launches for the week of October 19, 2015 Deutsche Bank rolls out a hedged alternative to ASHR (10/20) : The Deutsche X-trackers CSI 300 China A-Shares Hedged Equity ETF (NYSEARCA: ASHX ) will provide access to China A-share equities while mitigating exposure to fluctuations between the value of the Chinese renminbi and the U.S. dollar. This is a variation on the already popular Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEARCA: ASHR ). CSOP Asset Management launched 2 China ETFs as well (10/20) : There seemed to be a trend on the 20th, as CSOP Asset Management launched two new China focused ETFs to accompany its first fund, the CSOP FTSE China A50 ETF (NYSEARCA: AFTY ). The CSOP MSCI China A International Hedged ETF (NYSEARCA: CNHX ) is another currency hedged China A-shares fund, and the CSOP China CSI 300 A-H Dynamic ETF (NYSEARCA: HAHA ) tracks the CSI 300 Smart Index, which will switch between A and H shares of CSI 300 Index constituent companies based on their relative prices. This is a tricky one, so make sure to do your homework before diving in. State Street Global Advisors brings a new U.S. dividend fund to market (10/22) : The SPDR S&P 500 High Dividend ETF (NYSEARCA: SPYD ) tracks an index of the top 80 dividend-paying securities listed on the S&P 500, based on dividend yield. State Street is of course best known as the issuer behind the SPDR S&P 500 ETF (NYSEARCA: SPY ). Fund closures for the weeks of October 12 and 19, 2015 Direxion Daily 7-10 Year Treasury Bull 2x Shares ETF (NYSEARCA: SYTL ) Direxion Daily Mid Cap Bull 2x Shares ETF (NYSEARCA: MDLL ) Direxion Daily Basic Materials Bull 3x Shares ETF (NYSEARCA: MATL ) Have any other questions on ETFs or ETNs? Please comment below and I will try to clear things up. As an author and editor I have found that constructive feedback is the best way to grow. What you would like to see discussed in the future? How can I improve this series to meet reader needs? Please share your thoughts on this first edition of the ETF Update series in the comments section below. Have a view on something that’s coming up or a new fund? Submit an article.