CSI A500 = China's S&P 500 Equivalent?
The China Securities Index (CSI) company is launching a new index, the CSI A500, on 23 September 2024. This seems reminiscent of the popular S&P 500 Index in the U.S., which is not surprising, given that China has adopted many successful concepts and business models from the U.S. The U.S. has the most sophisticated financial markets globally, making it a logical source of inspiration. Moreover, as China is the closest in economic size to the U.S., it seems fitting to have a 500-company index representing its economy, similar to the S&P 500.
The CSI A500 selects 500 securities with large market capitalizations and good liquidity from various industries, reflecting the performance of the most representative listed companies across sectors. A noteworthy addition to this index is the consideration of factors like ESG scores, rather than just market cap and liquidity.
These 500 companies appear to be better-quality businesses. The return on equity (ROE) for the CSI A500’s constituent stocks is 12.81%, significantly higher than the 8.51% of the broader CSI All-Share Index. Furthermore, the CSI A500 has delivered superior returns compared to other broad-based indices. From January 1, 2014, to July 31, 2024, it returned 53.93%, outperforming existing benchmarks like the CSI 300, CSI 800, and CSI All Index.
Fund management companies anticipate this index will gain popularity, with 10 ETFs tracking the CSI A500 already approved. Harvest Fund Management was particularly successful, hitting its 2 billion-yuan ceiling and closing its offering ahead of schedule. Here are the list of the ten ETFs to be launched:
China Merchants CSI A500 ETF (招商中证A500ETF) Ticker:560610
Fullgoal CSI A500 ETF (富国中证A500ETF) Ticker:563220
Guotai CSI A500 ETF (国泰中证A500ETF) Ticker:159338
Harvest CSI A500 ETF (嘉实中证A500ETF) Ticker: 159351
Huatai-PineBridge CSI A500 ETF (华泰柏瑞中证A500ETF) Ticker:563360
Invesco Great Wall CSI A500 ETF (景顺长城中证A500ETF) Ticker:159353
JPMorgan CSI A500 ETF (摩根中证A500ETF) Ticker:560530
Southern CSI A500 ETF (南方中证A500ETF) Ticker:159352
Taikang CSI A500 ETF (泰康中证A500ETF) Ticker:560510
YinHua CSI A500 ETF (银华中证A500ETF) Ticker:159339
These ETFs are competitively priced, with a total annual expense ratio of 0.2% (management fee of 0.15% and custody fee of 0.05%). A notable feature of some of these ETFs is the quarterly mandatory dividend mechanism. If the excess return of the ETF relative to the underlying index at the end of each quarter is positive, at least 60% of that return must be distributed to investors. This feature will likely appeal to income-focused investors seeking regular, tangible returns.
However, it is unlikely that the CSI A500 will quickly rival the U.S. S&P 500. ETFs tracking the S&P 500 hold over US$1 trillion in assets, while the 10 CSI A500 ETFs combined have garnered close to US$1 billion. Building a substantial asset base takes time, and investors should temper their expectations, as China’s stock market still needs time to mature. Additionally, Chinese stocks have struggled for three consecutive years, and one cannot expect demand to recover overnight.
A major limitation of the CSI A500 is its lack of representation of Hong Kong-listed counters and U.S. ADRs. This has long been an issue with China's equity markets, as they are fragmented with restrictions. Foreigners can only access A-shares through the Stock Connect program via Hong Kong, and mainland investors have quotas for investing in overseas stocks, such as U.S. ADRs. Many of China’s big tech companies, like Tencent, Alibaba, Meituan, and PDD, are listed in Hong Kong or the U.S. As a result, the CSI A500 has a smaller allocation to tech, with industrials forming the largest component. This differs from the S&P 500, which is heavily weighted toward tech giants.
Given these limitations, we prefer the MSCI China Index, which is more comprehensive and includes China-domiciled companies listed globally. Nonetheless, the CSI A500 is a positive development, especially if it attracts more investment and increases demand for its underlying stocks, ultimately benefiting investors with higher returns.
Should foreign investors be interested in the CSI A500 ETFs, the good news is that these ETFs listed on Mainland exchanges are available through Stock Connect, enabling foreign investors to buy and sell them once they begin trading.