While the increased choice of global exchange-traded funds on the JSE is welcomed, Simon Brown does warn against concentration risk that comes with the new Satrix ETF tracking the MSCI China Index.
Satrix is launching a new exchange-traded fund (ETF) this month that will track Chinese stocks. This is a first for the JSE; there was an exchange-traded note (ETF) from Deutsche Bank which as delisted in January. This new ETF will be eligible to be included in your tax-free investment portfolio and, of course, in a discretionary investment portfolio.
This new ETF is a feeder fund, which means Satrix will be buying the iShares MSCI China UCITS ETF issued by BlackRock. This does help the process and reduce costs, but the total expense ratio will still be 0.63%. This is higher than we’re used to with most general-market ETFs in SouthAfrica. But emerging market ETFs are generally more expensive due to smaller fund sizes and the challenges that come with buying emerging-market assets and currencies.
The top holdings in the ETF will be Alibaba and Tencent, at 17.59% and 14.8%respectively, with China Construction and Ping An Insurance the next two holdings at 3.69% and 2.69%. So, there is concentration risk in the top holdings and, of course, Tencent is well-known to South Africans who are likely already exposed to this company through Naspers* or Prosus.
It is also worth noting that exposure to technological stocks is low at under 5%. The largest sectors are consumer discretionary at almost 29%, and communication services at just over 22%.
The Satrix MSCI China ETF’s initial public offering (IPO) will conclude on 16 July and it plans to list on the JSE on 22 July. The only real benefit of getting in on the IPO is that you don’t pay any brokerage.
Also remember that because it is an ETF, there won’t be any listing “pop” on the day where the price may surge. The TEF will just trade at its underlying fair value.
This is a great addition to the local ETF space, but should one buy it?
China is the world's second-largest economy, representing about 15% of world GDP, yet in most global ETFs it constitutes less than 3% of their holdings. Even if we look through the earnings of US-listed stocks doing business in China (for instance Apple), we’re still not likely to have as much as even 10% exposure to China.
For SA investors, this exposure is, however, very much skewed due to the Tencent stake of Naspers and Prosus. These two companies dominate local ETFs and even most of the Regulation 28 and discretionary funds will have a fair holding in these stocks and, by extension, in China.
Furthermore, there are concerns about the regulatory environment in China, with US stock exchanges now considering delisting US-listed Chinese stocks due to an alleged lack of regulatory oversight.
I also worry about concentration risk into a single economy, even if it is the world’s second-largest and one of the fastest- growing. As such, a better entry point into China may be the Satrix MSCI Emerging Markets ETF that listed back in August 2017. This ETF currently has 39% exposure to China and offers great exposure to other emerging markets, with Taiwan and South Korea both around 12%, India at 8% and Brazil 5%. In other words, it is a much more geographically diverse ETF covering several of the world’s fastest-growing economies, rather than a single country.
Personally, while I like the China growth story, I do worry about the regulatory risk and would prefer the more diverse emerging market ETF. But make no mistake, I love that Satrix is bringing more choice to our market – this is always a win for investors.
*finweek is a publication of Media24, a subsidiary of Naspers.