VWO and China A Shares

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
chugachman
Posts: 2
Joined: Sun Oct 11, 2015 4:24 pm

VWO and China A Shares

Post by chugachman » Sun Oct 11, 2015 4:35 pm

I was wondering what everyone thought of Vanguard starting to add China A shares to their emerging market funds later this year.

Should I be concerned? I'm not really comfortable with that kind of allocation in the fund to China when the dust finally settles. It looks like all the other fund families are doing the same so I can't switch out. The expense ratios for the few actively managed are outrageous!

I really don't want to have to add country specific funds to balance it out. I wish I could buy an index that doesn't include China and then weigh that one as I see fit.

Or am I worried about nothing; after all, my total emerging markets exposure in only 5% of my equities which represent 85% of my total portfolio

User avatar
jhfenton
Posts: 4397
Joined: Sat Feb 07, 2015 11:17 am
Location: Ohio

Re: VWO and China A Shares

Post by jhfenton » Sun Oct 11, 2015 7:16 pm

We had some discussions about this during the summer after Vanguard announced the transition index for VWO/VEMAX/VEIEX (Vanguard FTSE Emerging Markets ETF/Admiral/Investor). I am also concerned that long-term (not with the initial 5% addition of A-shares) VWO will be too concentrated in China. I have 15% of our portfolio in VWO, and I'm not crazy about half of that eventually being tied to China. It's not so much that I wouldn't want 7.5% of our portfolio in China--though that I'd be happier with 5%. It's primarily that I won't like China swamping every other EM in the world inside a single fund.

So ideally, I'd like to dilute VWO with an ex-China emerging markets fund.

As far as I know IEMG (iShares MSCI Core EM) does not have any plans at present to add China A-shares, but IEMG is still 22% China. That is one cost-effective option, but it's not very dilutive. And it's also probably just a short-term solution as MSCI will probably add mainland shares eventually.

Alternatively, there are already some beyond BRICs ETFs (e.g., EMFM, EMHZ, BBRC) that exclude the largest 4-7 emerging markets, and in some cases add a few of the largest frontier markets. Unfortunately, they are all more expensive (50-58 bp) and don't particularly trade well. I'm hoping that eventually this segment will mature and a cheap, ex-China/ex-BRICs EM index fund will emerge.

Finally, there are also single country or regional funds. There are liquid, but more expensive funds like ILF (iShares Latin America 40 @ 49 bp) or EWZ (iShares MSCI Brazil @ 62 bp).

At the moment, I'm doing exactly nothing. It'll probably be a couple of years at least before VWO becomes 40-50% China. Who knows what options will be available by then.

lack_ey
Posts: 6701
Joined: Wed Nov 19, 2014 11:55 pm

Re: VWO and China A Shares

Post by lack_ey » Sun Oct 11, 2015 7:32 pm

I guess I'm a bit concerned in the shortish term, the next several years as this plays out, from a timing perspective. China A shares are still way up from where they were not too long ago.

But if we're talking the long term (and most of us are long-term investors, right?) and the big picture, I like seeing more China there. China is economically very important and has a very large market cap. That market cap is not currently properly represented in broad-market international funds. As more Chinese money pours out internationally and foreign money pours in and inevitably changes the investing landscape there, sure, bring it on. While I don't personally think much of the idea that the ideal weighting is market-cap weighting different markets, I don't particularly think I know which markets are going to do well and are certain amounts of risky, and I'm surprised by all the people who seem to have very active ideas about what percentage their China allocation should be.

There's a lot of funny business in countries other than China out there. And the fund's exposure to China won't grow all that significantly until things are already different there.

And at total markets = 5% of equities, this is basically a blip and why are you even thinking about this at all?

User avatar
jhfenton
Posts: 4397
Joined: Sat Feb 07, 2015 11:17 am
Location: Ohio

Re: VWO and China A Shares

Post by jhfenton » Sun Oct 11, 2015 7:44 pm

lack_ey wrote:I guess I'm a bit concerned in the shortish term, the next several years as this plays out, from a timing perspective. China A shares are still way up from where they were not too long ago.
More than the absolute valuation, I'm concerned by the valuation gap between A-Shares and Hong Kong-traded mainland shares. The gap is a symptom of a closed market, which is why I'm so surprised that Vanguard elected to be a first-mover.

lack_ey
Posts: 6701
Joined: Wed Nov 19, 2014 11:55 pm

Re: VWO and China A Shares

Post by lack_ey » Sun Oct 11, 2015 7:53 pm

jhfenton wrote:
lack_ey wrote:I guess I'm a bit concerned in the shortish term, the next several years as this plays out, from a timing perspective. China A shares are still way up from where they were not too long ago.
More than the absolute valuation, I'm concerned by the valuation gap between A-Shares and Hong Kong-traded mainland shares. The gap is a symptom of a closed market, which is why I'm so surprised that Vanguard elected to be a first-mover.
Yes but Vanguard is aware of these kinds of discrepancies, and their traders aren't dummies. They don't completely have to follow even the transitional index to the letter and right now.

And even if they somehow purchase all A shares at on average say 50% above true value or equivalent HK-traded prices, this is 5% of the portfolio. That would suck but it's not going to kill us in the long term.

User avatar
in_reality
Posts: 4529
Joined: Fri Jul 12, 2013 6:13 am

Re: VWO and China A Shares

Post by in_reality » Sun Oct 11, 2015 7:55 pm

Yes, I have concerns. No, I don't how much you should worry about that allocation.

I personally am unable to understand the system well.

Take for example the "quota system" for foreign investors: http://www.ftse.com/products/downloads/ ... hmarks.pdf
p.21 wrote:There is a built-in mechanism ensuring that the allocation of China A-shares is in line with the accessibility available to international investors.
and
p.22 wrote:Based on this allocation methodology, the China A constituents would have a weight of 4.83 per cent in the FTSE Emerging Markets China A Inclusion Index, which corresponds to a weight of 0.46 per cent in the FTSE All-World China A Inclusion Index.
This is not the allocation going into VWO though. FTSE has several indexes and the one I believe VWO targets is along the lines of:
p. 24 wrote:There might also be some market participants who wish to see the potential size of China reflected in global benchmarks in the absence of quota restrictions.
and
When the FTSE All Cap Indexes are considered, the China A-share constituent weightings are even higher at 27.26 and 3.26 per cent.
FTSE understands that this is not simple market capitalization weighting here and comments on their basket of indexes that:
p.28 wrote:The index users will be offered the options to choose their China A-shares allocation based on differing quotas or views on the market. Index users can adopt either 1) Global benchmarks with China A-shares included and weighted by the aggregate approved quota, 2) Global benchmarks with China A-shares included and weighted by free float and foreign ownership-adjusted market value as if no quota restriction existed or 3) Customised indexes based on an investors own QFII/RQFII allocation. For those market participants who do not wish to have A-shares in their global benchmarks they can continue to use the FTSE Global Equity Index Series.
So I may be wrong, but I think VWO is going with #2 above, but don't know why of if that is the appropriate target for market capitalization weight. It seems more like a REIT thing where people overweight the available REITs to compensate for what they can't get on the market. If foreign ownership is restricted by quota, but we are buying into the market as there were no restrictions (as seems to be the case in #2), then what?

Obviously I don't understand this well and may be wrong someplace.

I have other questions too and perhaps will post later when I have time.

User avatar
jhfenton
Posts: 4397
Joined: Sat Feb 07, 2015 11:17 am
Location: Ohio

Re: VWO and China A Shares

Post by jhfenton » Sun Oct 11, 2015 8:09 pm

lack_ey wrote:Yes but Vanguard is aware of these kinds of discrepancies, and their traders aren't dummies. They don't completely have to follow even the transitional index to the letter and right now.

And even if they somehow purchase all A shares at on average say 50% above true value or equivalent HK-traded prices, this is 5% of the portfolio. That would suck but it's not going to kill us in the long term.
I agree. That's why my brilliant plan is to do nothing for the foreseeable future. :beer

User avatar
watchnerd
Posts: 2528
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: VWO and China A Shares

Post by watchnerd » Tue Jan 14, 2020 10:00 am

jhfenton wrote:
Sun Oct 11, 2015 7:16 pm

So ideally, I'd like to dilute VWO with an ex-China emerging markets fund.
iShares EMXC

https://www.ishares.com/us/products/288 ... a-etf-fund
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

User avatar
jhfenton
Posts: 4397
Joined: Sat Feb 07, 2015 11:17 am
Location: Ohio

Re: VWO and China A Shares

Post by jhfenton » Tue Jan 14, 2020 10:31 am

watchnerd wrote:
Tue Jan 14, 2020 10:00 am
jhfenton wrote:
Sun Oct 11, 2015 7:16 pm

So ideally, I'd like to dilute VWO with an ex-China emerging markets fund.
iShares EMXC

https://www.ishares.com/us/products/288 ... a-etf-fund
I watch both EMXC with $30 MM in assets at 0.49% ER and XCEM/Columbia EM Core ex-China with $17 MM in assets at 0.16%.

Both are small. 0.49% is way too expensive for a vanilla ex-China EM index fund. And unfortunately XCEM also trades with an absurd spread. XCEM is at serious closure risk.

Currently I dilute VWO/VEMAX with EYLD/Cambria EM Shareholder Yield. It costs 0.66%, but it combines a serious value tilt with quality and a significant size tilt and about half the usual weight in China (all Hong Kong). By the nature of its screen for dividends and share buybacks, it also avoids the dilution issue common in emerging markets and avoids the large state-owned enterprises. I wish it were cheaper, but compared to other EM small-cap funds, the price is not outrageous.

lazyday
Posts: 3738
Joined: Wed Mar 14, 2007 10:27 pm

Re: VWO and China A Shares

Post by lazyday » Tue Jan 14, 2020 10:55 am

For lower expenses, you can look at the Franklin Liberty funds. .19% for EM, .09 for Korea.
https://www.franklintempleton.com/inves ... ssive-etfs

If you believe in a rebalancing bonus, you could put 14% into each of Korea, China, Taiwan, India, Latin America, South Africa, Russia.

Or to dilute VWO, I guess you could own the last 4 or 5 of those.

The funds are tiny so I wouldn’t own them in taxable in case they liquidate. I own FLKR in a Roth and have found it easy to trade.

MnD
Posts: 4398
Joined: Mon Jan 14, 2008 12:41 pm

Re: VWO and China A Shares

Post by MnD » Tue Jan 14, 2020 11:06 am

What makes anyone think they are smarter than the people that construct, update and utilize these indices and thus can "roll their own" with various tilts or exclusions and have better outcomes on a risk-adjusted basis?
70/30 AA, Global market cap equity. Rebalance if FI <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.

User avatar
jhfenton
Posts: 4397
Joined: Sat Feb 07, 2015 11:17 am
Location: Ohio

Re: VWO and China A Shares

Post by jhfenton » Tue Jan 14, 2020 11:14 am

lazyday wrote:
Tue Jan 14, 2020 10:55 am
For lower expenses, you can look at the Franklin Liberty funds. .19% for EM, .09 for Korea.
https://www.franklintempleton.com/inves ... ssive-etfs

If you believe in a rebalancing bonus, you could put 14% into each of Korea, China, Taiwan, India, Latin America, South Africa, Russia.

Or to dilute VWO, I guess you could own the last 4 or 5 of those.

The funds are tiny so I wouldn’t own them in taxable in case they liquidate. I own FLKR in a Roth and have found it easy to trade.
Thanks for the suggestion. I do watch the Franklin single-country/region funds too, because I really want them to succeed as alternatives to the 50-60+ bp price tags on the older, larger iShares and GlobalX single country funds. They're definitely suffering from a target market problem. I suspect most single-country fund buyers are traders, and traders care more about trading costs than fund expenses.

But I really don't want to complicate things with a bunch of single-country funds. Right now, I own two EM funds, one vanilla, one value/quality/size tilted. That's enough complexity.

User avatar
watchnerd
Posts: 2528
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: VWO and China A Shares

Post by watchnerd » Tue Jan 14, 2020 11:42 am

MnD wrote:
Tue Jan 14, 2020 11:06 am
What makes anyone think they are smarter than the people that construct, update and utilize these indices and thus can "roll their own" with various tilts or exclusions and have better outcomes on a risk-adjusted basis?
I don't. I'm just trying to get market weight.

VXUS doesn't reflect market weight. VWO + VEA can be made market weight.

They're all FTSE indexes. VXUS excludes the China A-shares because they're rationed and its AUM is too big.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

vu8
Posts: 375
Joined: Tue May 29, 2018 10:15 am
Location: Columbus, Ohio

Re: VWO and China A Shares

Post by vu8 » Tue Jan 14, 2020 12:08 pm

All available information is already included in the price itself. What makes you think that other millions of investors know anything less than you about China?

User avatar
watchnerd
Posts: 2528
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: VWO and China A Shares

Post by watchnerd » Tue Jan 14, 2020 12:18 pm

vu8 wrote:
Tue Jan 14, 2020 12:08 pm
All available information is already included in the price itself. What makes you think that other millions of investors know anything less than you about China?
Which case are you referring to?

Those who want to exclude China?

Or those who want to include China A-shares?

As for the millions of investors, the point of holding A-shares is to include more of them. Generally, investors inside of China can only buy A-shares. They can't buy the B-shares, which is what VXUS holds. And as for price discovery, the shares aren't priced the same.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

User avatar
jhfenton
Posts: 4397
Joined: Sat Feb 07, 2015 11:17 am
Location: Ohio

Re: VWO and China A Shares

Post by jhfenton » Tue Jan 14, 2020 12:40 pm

vu8 wrote:
Tue Jan 14, 2020 12:08 pm
All available information is already included in the price itself. What makes you think that other millions of investors know anything less than you about China?
I take it that your only investment is the global market portfolio. You own all available assets in their true global market weights. If not, what do you know that millions of other investors don't know?

I do not own the global market portfolio. I own no developed market ex-US bonds. I own some EM bonds, but probably below market weight. I have 50% of equities in ex-US, close to market weight, but I underweight developed at 25% and overweight EM at 25%. I also tilt small on my ex-US. I tilt small and value on our 50% US. And at about 84/16 equities/fixed income, I overweight equities compared to the market. Except for what is inside Vanguard Total Bond, I do not own any long term bonds, another deviation.

Everyone makes calls on asset weightings, both directly and by farming decisions out to index makers who make judgment calls. In most cases, investors do both. And they should. Individual investors do not share important characteristics with many global market participants. They have varied risk tolerance and varied investment time horizons.

Furthermore, talking about a global market assumes there is a single global market. There isn't. There are many separate markets, isolated to widely-varying degrees. On-shore China equities, being one of the more isolated markets. There is no "market" that decides the relative weight of US treasuries vs US equities vs China equities vs India equities vs every other asset.

User avatar
Stef
Posts: 336
Joined: Thu Oct 10, 2019 10:13 am

Re: VWO and China A Shares

Post by Stef » Tue Jan 14, 2020 1:16 pm

What's the market cap of China A shares? Does it change their 3.5% total market cap of the world?

User avatar
danielc
Posts: 889
Joined: Sun Dec 10, 2017 4:48 am
Location: Iowa, USA
Contact:

Re: VWO and China A Shares

Post by danielc » Tue Jan 14, 2020 1:29 pm

chugachman wrote:
Sun Oct 11, 2015 4:35 pm
I was wondering what everyone thought of Vanguard starting to add China A shares to their emerging market funds later this year.

Should I be concerned? I'm not really comfortable with that kind of allocation in the fund to China when the dust finally settles. It looks like all the other fund families are doing the same so I can't switch out. The expense ratios for the few actively managed are outrageous!

I really don't want to have to add country specific funds to balance it out. I wish I could buy an index that doesn't include China and then weigh that one as I see fit.

Or am I worried about nothing; after all, my total emerging markets exposure in only 5% of my equities which represent 85% of my total portfolio
I think it's a legitimate concern. Emerging market stock funds are too heavy on China for my taste. I used to have a tilt toward emerging markets, but now I don't. To gain different exposure to emerging markets ex-China I invested in emerging market bonds. They have equity-like risks and returns, and they are dominated by countries nowhere near China (mostly Latin America, followed by Eastern Europe, and the Middle East).

https://personal.vanguard.com/pdf/ISGEMB.pdf

https://papers.ssrn.com/sol3/papers.cfm ... id=3338913

azanon
Posts: 2631
Joined: Mon Nov 07, 2011 10:34 am

Re: VWO and China A Shares

Post by azanon » Tue Jan 14, 2020 1:32 pm

As competitive and hard working as China seems to be, I'm comfortable with almost any allocation to their country. I'm not an expert on their people by any means, but they don't strike me as the type to not go down without a fight, figuratively or literally. So if they succeed, I definitely want in on that.

User avatar
danielc
Posts: 889
Joined: Sun Dec 10, 2017 4:48 am
Location: Iowa, USA
Contact:

Re: VWO and China A Shares

Post by danielc » Tue Jan 14, 2020 2:25 pm

azanon wrote:
Tue Jan 14, 2020 1:32 pm
As competitive and hard working as China seems to be, I'm comfortable with almost any allocation to their country. I'm not an expert on their people by any means, but they don't strike me as the type to not go down without a fight, figuratively or literally. So if they succeed, I definitely want in on that.
What makes you think that Chinese success will be reflected in stock market returns? What if success comes in the form of creation of new companies rather than growth of existing ones that you can buy today?

azanon
Posts: 2631
Joined: Mon Nov 07, 2011 10:34 am

Re: VWO and China A Shares

Post by azanon » Tue Jan 14, 2020 3:12 pm

danielc wrote:
Tue Jan 14, 2020 2:25 pm
azanon wrote:
Tue Jan 14, 2020 1:32 pm
As competitive and hard working as China seems to be, I'm comfortable with almost any allocation to their country. I'm not an expert on their people by any means, but they don't strike me as the type to not go down without a fight, figuratively or literally. So if they succeed, I definitely want in on that.
What makes you think that Chinese success will be reflected in stock market returns? What if success comes in the form of creation of new companies rather than growth of existing ones that you can buy today?
Your questions have a lot to do with explaining why I globally diversify. So if you ask me, the investor that would have the burden of explaining oneself would be the investor who excludes certain countries, including China.

The only ones I know that I'm not invested in are Frontier countries, and I don't bother, because it would be statistically irrelevant, if i purchased them at market weights. Also it's very expensive to do that (over 50 bps for Frontier country ETF).

User avatar
danielc
Posts: 889
Joined: Sun Dec 10, 2017 4:48 am
Location: Iowa, USA
Contact:

Re: VWO and China A Shares

Post by danielc » Tue Jan 14, 2020 3:26 pm

azanon wrote:
Tue Jan 14, 2020 3:12 pm
danielc wrote:
Tue Jan 14, 2020 2:25 pm
azanon wrote:
Tue Jan 14, 2020 1:32 pm
As competitive and hard working as China seems to be, I'm comfortable with almost any allocation to their country. I'm not an expert on their people by any means, but they don't strike me as the type to not go down without a fight, figuratively or literally. So if they succeed, I definitely want in on that.
What makes you think that Chinese success will be reflected in stock market returns? What if success comes in the form of creation of new companies rather than growth of existing ones that you can buy today?
Your questions have a lot to do with explaining why I globally diversify. So if you ask me, the investor that would have the burden of explaining oneself would be the investor who excludes certain countries, including China.

The only ones I know that I'm not invested in are Frontier countries, and I don't bother, because it would be statistically irrelevant, if i purchased them at market weights. Also it's very expensive to do that (over 50 bps for Frontier country ETF).
For what it's worth, I don't exclude China. But I had initially planed to have a tilt toward emerging markets and I changed my mind because I worry that EM is not diversified.

User avatar
watchnerd
Posts: 2528
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: VWO and China A Shares

Post by watchnerd » Tue Jan 14, 2020 3:31 pm

azanon wrote:
Tue Jan 14, 2020 3:12 pm


Your questions have a lot to do with explaining why I globally diversify. So if you ask me, the investor that would have the burden of explaining oneself would be the investor who excludes certain countries, including China.

The only ones I know that I'm not invested in are Frontier countries, and I don't bother, because it would be statistically irrelevant, if i purchased them at market weights. Also it's very expensive to do that (over 50 bps for Frontier country ETF).

Passive investing is hard.

Our human tendency is to emphasize fore-thought, to try to take the limited information we have and come up with some kind of plan. You can see it in the trends over the years -- ex-Japan Asia funds, BRIC funds, healthcare / pharma funds that bank on aging demographics, funds of things that might do well because of potential climate change, etc, etc, etc.

It's really hard to embrace ignorance and put it into practice without backsliding regularly.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

azanon
Posts: 2631
Joined: Mon Nov 07, 2011 10:34 am

Re: VWO and China A Shares

Post by azanon » Tue Jan 14, 2020 3:41 pm

watchnerd wrote:
Tue Jan 14, 2020 3:31 pm
azanon wrote:
Tue Jan 14, 2020 3:12 pm


Your questions have a lot to do with explaining why I globally diversify. So if you ask me, the investor that would have the burden of explaining oneself would be the investor who excludes certain countries, including China.

The only ones I know that I'm not invested in are Frontier countries, and I don't bother, because it would be statistically irrelevant, if i purchased them at market weights. Also it's very expensive to do that (over 50 bps for Frontier country ETF).

Passive investing is hard.

Our human tendency is to emphasize fore-thought, to try to take the limited information we have and come up with some kind of plan. You can see it in the trends over the years -- ex-Japan Asia funds, BRIC funds, healthcare / pharma funds that bank on aging demographics, funds of things that might do well because of potential climate change, etc, etc, etc.

It's really hard to embrace ignorance and put it into practice without backsliding regularly.
Right, but from the completely opposite point of view, all of what you described is even harder. Probably the safest thing of all to do (behaviorally speaking) is to not even worry about this topic, and go extreme global market cap weight everything (read: buy VT, set it and forget it). Opt out of everything, and just accept whatever the global market makes, minus 9 basis points. The default global market portfolio minus 9 basis points, should be very competitive vs. the investor that is tinkering all of the time.

Post Reply