Morningstar highlights performance mismatch

mismatching_shoesDomestic Chinese indices have shown higher volatility and lower returns over the trailing three-year period than non-domestic Chinese indices, according to research by Morningstar Asia.

They have, however, shown lower volatility and similar returns over the trailing one-year period.

Jackie Choy, an ETF strategist, said domestic Chinese indices had similar key constituents, but placed different weights on them depending on each index’s construction methodology. The same applies to the non-domestic Chinese indices.

“Indices tracking Chinese equities are composed quite differently and have very different historical returns and risk profiles,” he said.

“All of these indices have a large concentration in the financial services sector, with the majority of this exposure being comprised of the shares of Chinese banks, at 30-60%.”

Choy highlighted that China’s tight capital controls and the fact that its domestic equity market is not entirely open to foreign investors.

ETFs that track domestic Chinese equity indices tend to use synthetic replication to access the A-shares market while physical replication ETFs are available for non-domestic Chinese equity indices.

“While both the domestic and non-domestic China markets should be inherently driven by the same fundamental factors, differences in index composition and the constituents’ listing locations result in different risk/reward profiles for investors,” Choy said. “This is the very reason that investors should know what flavour of China they want to achieve exposure to before investing.”

He said various regulatory constraints resulted in a variety of different types of investment channels and markets providing different types of access to China.

Today Morningstar launched its research reports on Asian ETFs listed in Hong Kong and Singapore.

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