ETF issuer Satrix is in the process of listing a new Chinese exchange-traded fund (ETF). Until 14 July 2020, ETF investors seeking access to the Chinese economy can pick up ETF units at no brokerage cost in the initial public offering (IPO).
Considering China is the second-largest economy in the world, gaining access to that market has been near impossible. Even with the Chinese stock market opening up to the rest of the world in the recent past, individual South African investors haven’t had easy, direct access to underlying shares until now.
The ETF is a feeder fund, ensuring cheap and efficient access to the Chinese economy. It invests in over 700 large and medium Chinese companies, covering 85% of the listed market across various sectors. It tracks the MSCI China index at a TER of 0.63%.
China in the world
The Just One Lap ETF investment strategy advocates investing in the global economy on a market capitalisation-weighted basis. Since many of the biggest companies in the world operate globally, it becomes difficult to follow this rule of thumb based purely on where companies earn their income.
South African giant Naspers, for example, earns much of its income in China through its shareholding in Tencent. Local investors could argue a holding in Naspers represents a Chinese holding, but Tencent by no means represents a diversified Chinese investment. Your exposure is limited to the strategies and success of two companies and a single sector. Should Naspers decide to sell some or all of its Tencent holdings, for example, your access to China is out the window.
Tencent is the second-largest holding in the Satrix China ETF. The number one spot belongs to Alibaba Group – a company selling consumer goods. With a population of over 1.4bn people, access to the profits of a company selling consumer goods seems like a very good idea indeed.
ETFs provide the added benefit of periodic reweighing. In general, this feature is a selling point, but it could hold even more true for Chinese holdings. Due to the Chinese political system, the environment can change quickly with very little notice. Holding an ETF that rebalances every quarter means responding to a changing environment as it changes.
According to World Bank statistics, China holds the second-biggest slice of the world GDP pie at 15.12%. Does this mean 15.12% of your portfolio should be invested in China? We discuss the implications of this decision in this podcast.
Should you buy China?
There’s only one question every investor needs to answer when it comes to adding new investments to a portfolio: does this fit into my strategy? To do that, you should have a clear idea of why you hold each investment and what that will mean for your portfolio in the long run.
Should you buy the Satrix China ETF because it’s new? No. Should you buy because you’ll save on brokerage? No. Should China be part of your long-term investment strategy? We look forward to hearing what you decide.
At Just One Lap, we are big fans of passive investment using ETFs. In this weekly blog, we discuss ETFs on the local market and the factors you need to consider when choosing an ETF. If you have wondered how one ETF differs from another, this is where you can find out. We explain which index each ETF tracks, what type of portfolio could benefit from holding each ETF, and how the costs will affect your bottom line.