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As of 2020, China is the second-largest economy in the world, forming about 17% of the global GDP (US$14.7 trillion) and only trailing the U.S. at almost 25% (US$20.9 trillion). Yet, Chinese equity markets only comprise about 11% of the world equity market value (US$12.2 trillion), compared to U.S. equity markets that dominate at around 42% (US$45.3 trillion). This under-representation can also be seen in some of the major indices that track global equities. For example, the MSCI All Country World Index (ACWI) only has a 4.93% allocation to China and the FTSE All World Index also only allocates 4.69% to China.
For investors who want to participate in China’s growth story, or want to increase their exposure to Chinese equities, an ETF focused solely on Chinese companies is a way to gain diversified exposure. Fortunately, Singapore investors have a variety of options available to us.
As of 12 July 2021, Singapore investors will have access to the Lion-OCBC Securities China Leaders ETF. This is a China-focused exchange traded fund (ETF) that tracks the Hang Seng Stock Connect China 80 Index. The initial offering period will be from 12 to 28 July 2021, after which it will be listed on the Singapore Exchange (SGX) on 2 August 2021.
Read Also: Complete Guide To ETF investing in Singapore
Before you think of investing in this China-focused ETF, here are 5 things to know about the new Lion-OCBC Securities China Leaders ETF.
#1 The ETF Tracks The Hang Seng Stock Connect China 80 Index
Investing in Chinese companies can be logistically confusing for investors since Chinese companies’ shares can be traded in mainland China through the Shanghai and Shenzhen stock exchanges, and also through the Hong Kong Stock Exchange (HKEX) via the Stock Connect scheme. This may require investors to use different brokers as well as different currencies (i.e. Renminbi and Hong Kong Dollars) in order to acquire their desired shares.
The Lion-OCBC Securities China Leaders ETF is an ETF that tracks the Hang Seng Stock Connect China 80 Index. This index includes the 80 largest Chinese companies in terms of market capitalisation listed in Hong Kong and/or mainland China. This means that investors will be able to access both China A-shares as well as mainland securities listed in Hong Kong through a single ETF, instead of buying individual shares from the Hong Kong Stock Exchange (HKEX), the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE).
The Hang Seng Stock Connect China 80 Index itself is also relatively new, having just been launched on 3 May 2021. This index will be reviewed half-yearly and rebalanced quarterly to ensure that companies that no longer meet the criteria are replaced by the highest-ranked candidate from the last regular review. While the index is weighted by market capitalisation, each company’s weighting in the index is capped at 8% and each industry’s weighting in the index is capped at 40%, which maintains the diversification of the index.
#2 The Top Constituents Of The Lion-OCBC Securities China Leaders ETF
Larger, state-owned companies, such as banks and energy firms, often trade on the SSE while smaller and emerging-sector companies tend to trade on the SZSE. Popular Chinese technology companies such as Tencent, Meituan and Xiaomi tend to trade on the HKEX.
As the Hang Seng Stock Connect China 80 Index covers the 80 largest companies on the HKEX, SSE and SZSE, its constituents cover the spectrum of old economy (i.e. financials) and new economy (i.e. technology).
|2||Kweichow Moutai||600519.SS||Consumer Staples||6.34|
|5||China Construction Bank||0939.HK||Financials||3.12|
|6||Wuliangye Yibin||000858.SZ||Consumer Staples||3.09|
|7||Contemporary Amperex Technology||300750.SZ||Industrials||2.54|
|8||Ping An Bank||000001.SZ||Financials||2.67|
|9||Ping An Insurance||2318.HK||Financials||2.26|
Source: Hang Seng Indexes Company, as of 4 June 2021
#3 Invest In A Variety Of Chinese Industries With The Lion-OCBC Securities China Leaders ETF
This variety in the constituents spans a wide range of industries. While financials do make up a significant portion of the top 10 constituents, there are also consumer staples, industrials and information technology (IT) companies to round out the mix. Looking at the top 20 constituents also brings in other sectors such as healthcare and consumer discretionary.
The Lion – OCBC Securities China Leaders ETF also allows investors to gain exposure to some global industry leaders (by market capitalisation) that may be underrepresented in other ETFs. For example, Kweichow Moutai and Wuliangye are the top two companies by market capitalisation in the alcoholic beverage industry, but they are not represented in global consumer staples ETFs, such as the iShares Global Consumer Staples ETF. Likewise, the “Big Four” Chinese banks – ICBC, China Construction Bank, Agricultural Bank of China and Bank of China are not included in most financial ETFs such as the Financial Select Sector SPDR Fund (XLF).
Additionally, China A-shares have shown a low correlation with the global markets historically. This is likely due to the underrepresentation of Chinese shares in global indices. However, this also makes China A-shares an investment we can consider if we want to construct a diversified global portfolio.
Source: Allianz Global Investors, 31 January 2020. Bloomberg, 30 June 2021.
#4 The ETF Is Available To Singapore Investors In SGD
Currently, the Lion-OCBC Securities China Leaders ETF is the only ETF available on the SGX (once it is listed on 2 August 2021) that tracks the Hang Seng Stock Connect China 80 Index.
For interested investors, the Lion-OCBC Securities China Leaders ETF is available for trading in Singapore Dollars (SGD), which makes it simple to trade without the hassle of making foreign exchange conversion. However, do take note that as the underlying equities of the Lion-OCBC Securities China Leaders ETF are traded in Renminbi, it does expose us to the currency risk of the Renminbi, even if we choose to trade in SGD. The Lion-OCBC Securities China Leaders ETF is also available for trading in Renminbi (RMB).
As this is a locally listed ETF, Singapore investors can invest and hold this Lion-OCBC Securities China Leaders ETF in our CDP accounts instead of a custodian account. Additionally, since this ETF is classified as an Excluded Investment Product (EIP), investors would not need to pass the Customer Account Review (CAR) or any trading certifications to buy or sell this Lion-OCBC Securities China Leaders ETF.
#5 The Total Expense Ratio Of The ETF
One key reason why investors choose to invest in ETFs is cost-efficiency. By investing in a single ETF, we can gain exposure to multiple companies without having to individually invest in each company which will not only be expensive, but also difficult to rebalance. At a Total Expense Ratio of 0.62%, the Lion-OCBC Securities China Leaders ETF is the lowest among China-focused ETFs listed on the SGX including Xtrackers MSCI China ETF at 0.65%, and the United SSE 50 China ETF at 1%, as of time of writing.
If you are interested to increase your portfolio exposure to Chinese companies, or to diversify your existing portfolios, the Lion-OCBC Securities China Leaders ETF is an attractive and easy way to do so.
Between 12 July (10am) and 26 July 2021 (12pm), you can subscribe to the Initial Offering Period (IOP) of Lion-OCBC Securities China Leaders ETF through a participating broker or OCBC ATM/ Internet Banking subscription. The participating dealers for the IOP are: OCBC Securities, Philips Securities, UOB Kay Hian, IFast Financial, Tiger Brokers and CGS-CIMB. Alternatively, you can subscribe to the IOP through OCBC ATMs island-wide or Internet Banking with only S$2.00 fee per application.
From 2 August 2021 onwards, the Lion-OCBC Securities China Leaders ETF will be listed on the SGX, and you can buy and sell the Lion-OCBC Securities China Leaders ETF with any broker who has access to the SGX.
For those who want to dollar-cost average their investments, the Lion-OCBC Securities China Leaders ETF will be available as a regular savings plan via the OCBC Blue Chip Investment Plan, from mid-August 2021.
Trading in securities, futures and/or leveraged foreign exchange and borrowing to finance the trading of securities (leveraging/gearing) can be very risky, and you may lose all or more than the amount invested or deposited. Where necessary, please seek advice from an independent financial adviser regarding the suitability of any trade or investment product taking into account your investment objectives, financial situation or particular needs before making a commitment to trade or purchase the investment product. You should consider carefully and exercise caution in making any trading decision whether or not you have received advice from any financial adviser. If you choose not to seek independent financial advice, please consider whether the trade or product in question is suitable for you.
This ETF is subjected to the following principal risks including but not limited to market risk, index sector risks, concentration risk, tracking error risk, foreign exchange risk and risk factors relating to the index. Some or all of the risks may adversely affect the Fund’s Net Asset Value, yield, total return and/or its ability to achieve its investment objective. You should note the risk factors associated with investing in the ETF. The statements in the prospectus are intended to be summaries of some of these risks. They are by no means exhaustive and they do not offer advice on the suitability of investing in the ETF. You should read the prospectus and carefully consider the risk factors described together with all of the other information included in the prospectus before deciding whether to invest in the ETF. A copy of the prospectus can be obtained from OCBC Securities website.
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