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5 Things To Know About the Phillip-China Universal MSCI China A 50 Connect ETF Before Investing In It

Invest in the world’s second largest economy.

Currently, China is the second-largest economy in the world, behind the United States.

Although its economic growth has slowed in recent years, the Chinese government is targeting a 5% growth rate for 2024. This rate significantly outpaces that of other major economies. As a result, investors remain interested in China’s growth story, given its size and increasingly affluent population.

This interest has led to several listings of China-related exchange-traded funds (ETFs) on the Singapore Exchange (SGX). The SGX has facilitated this growth through a bilateral ETF link with the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE).

One of the recent introductions to the SGX, aimed at giving investors access to the Chinese market, is the Phillip-China Universal MSCI China A 50 Connect ETF (SGX: MCN/MCS), which was listed on 20 March 2024.

For investors considering China-related investments on the SGX, here are five key things to know about the Phillip-China Universal MSCI China A 50 Connect ETF before making an investment decision.

#1 The ETF Invests In 50 Large And Mid-Cap China A Shares

As its name suggests, the Phillip-China Universal MSCI China A 50 Connect ETF invests in 50 large and mid-cap stocks that are listed on the key exchanges in Shanghai and Shenzhen. These stocks, known as “A shares,” are typically accessible primarily to investors based in China or to those with accounts in Hong Kong who can purchase shares through the Hong Kong-Shanghai/Shenzhen Stock Connect programs.

The underlying index that the ETF tracks is the MSCI China A 50 Connect Index. According to MSCI, the average market capitalisation of the 50 constituents is US$12.4 billion. Within the index, the largest company has a market cap of US$47 billion and the smallest constituent company has a market cap of US$3.1 billion.

The index employs a sector-neutral approach to ensure representation across various sectors. It adheres to MSCI’s investability criteria and is available through the existing Stock Connect schemes in Hong Kong.

Overall, the index strives to provide broad diversification across the Chinese economy, aiming to represent a balanced cross-section of industries in an accessible format for investors outside mainland China.

Read Also: Beginner’s Investment Guide to Hong Kong-Listed China Stocks

#2 The Phillip-China Universal MSCI China A 50 Connect ETF Is A Feeder Fund

The Phillip-China Universal MSCI China A 50 Connect ETF’s listing on the SGX serves as a feeder fund to a more substantial underlying ETF listed in Shanghai. This arrangement is part of a “master-feeder fund model” agreement between the SGX and the mainland China exchanges.

Under this model, investors in Singapore can access local Chinese ETFs through an SGX-listed feeder ETF, facilitating investment in the Chinese market without the need for direct exposure to mainland China’s financial systems.

The underlying fund is managed by China Universal Asset Management (CUAM) and is named the CUAM MSCI China A 50 Connect ETF. This primary ETF was listed on the Shanghai Stock Exchange (SSE) in November 2021.

Through this structure, the feeder ETF in Singapore mirrors the performance and investment strategy of the master fund in Shanghai, allowing investors to benefit from the same investment opportunities as if they were directly invested in the Chinese market. This setup simplifies the investment process for those looking to engage with Chinese equities via a regulated and familiar platform in Singapore.

#3 Total Expense Ratio For The ETF Is Approximately 0.70% Or Higher

The Phillip-China Universal MSCI China A 50 Connect ETF listed on the SGX has a current headline management fee of 0.01% per annum and a trustee fee of 0.02% per annum, but those fees apply only to the feeder fund.

The underlying ETF that is listed on the SSE has a management fee of 0.50% per annum.

According to Phillip Capital Management—which co-launched the SGX ETF with CUAM—the feeder ETF’s custodian fee may exceed 0.10% per annum. Meanwhile, the underlying ETF’s custodian fee is currently 0.10% annually.

Overall, while the feeder fund’s total expense ratio (TER) is relatively low, the investor’s broader TER (if we include the underlying ETF) is likely to be in the region of 0.70% or slightly higher.

#4 The Top 10 Constituents For The Phillip-China Universal MSCI China A 50 Connect ETF Make Up 47% Of The ETF

The Phillip-China Universal MSCI China A 50 Connect ETF allows investors to invest in numerous innovative Chinese companies. However, since the reference index only includes 50 stocks, it can also be relatively concentrated.

As of 1 March 2024, the top 10 constituents of the ETF accounted for 46.5% of its total holdings, with the top five stocks alone constituting nearly 30% of the ETF. This concentration indicates that the performance of the ETF’s largest holdings could significantly influence its performance.

Sector-wise, the ETF has its most substantial exposures in Financials, which make up 19.6% of the portfolio. This is followed by Information Technology at 15.0%, Consumer Staples at 14.1%, Industrials at 14.6%, and Materials at 10.4%. These top five sectors reflect the ETF’s strategic focus on areas crucial to China’s current economic expansion and industrial modernisation.

Looking at individual stock holdings, the three largest positions within the ETF are Kweichow Moutai, which represents 7.54% of the portfolio, CATL at 6.75%, and Zijin Mining at 5.45%. These holdings underscore the ETF’s investment in key players within their respective industries, ranging from traditional sectors like liquor production and mining to contemporary sectors like battery manufacturing.

Source: Phillip Capital Management

#5 ETF Available In Both SGD And USD Share Classes

As is becoming common with China-focused ETFs listed on the SGX, the Phillip-CUAM MSCI China A 50 Connect ETF is available to investors in two share classes.

The primary share class is in SGD and is traded under the ticker “MCN”; the secondary share class is in USD and trading under the ticker “MCS”.

This aims to give Singapore-based investors more stability in terms of the currency fluctuations that may be seen in the Chinese yuan.

Read Also: Largest China Companies That We Can Invest In Today

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