Posted inHead To Head, News, Research

HEAD-TO-HEAD: Seven China equity ETFs compared

FSA compares no fewer than seven China equity ETFs available to Hong Kong investors tracking the same index, the CSI 300.
by Fund Selector Asia
Synthetic replication vs physical replication

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Two of the seven ETFs are based on synthetic replication of the index: the BOC HK Wise ETF and the DB x-Trackers ETF. Synthetic ETFs rely to a large extent on replicating the performance of the underlying index by using derivatives (swaps or futures contracts).

ETFs with physical replication hold shares of companies included in the underlying index. Managers of physical ETFs can also use swaps, if needed, but the Hong Kong Exchange specifies that in order to be classified as “physical replication”, an ETF must have at least 70% of its assets in shares.

“Synthetic ETFs usually track [the indices] more consistently,” Jackie Choy, ETF strategist at Morningstar, told FSA. It is because the ETF manager enters into a contract with the swap or future counterparty to provide the exact return of the underlying index.

Physical ETFs, by comparison, are more susceptible to tracking error. It can result from the trading of shares for creation or redemption of ETF units, or in case of index rebalancing.

Of the two synthetic ETFs, the DB x-Tracker fund had a moderate level of tracking error, 1.18, while delivering the best one-year return, and a mediocre 3-year return among the seven ETFs in our sample. The other synthetic product, the BOC HK Wise ETF, had a higher tracking error, 1.71, while placing fifth by the one-year return and sixth by the three-year return.

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