China ETFs & Chinese equity, income funds and quantitative methods explained

Here is a sample of the questions that were discussed In this week’s PensionCraft live Q&A call with Ramin. If you want to find out the full answers to these questions or ask some for yourself, then you can subscribe on Patreon here

The full set of notes and video replay are available for Patreon supporters here


What are the pros and cons of the different China indexes and ETFs? 

  • Chinese Stock Exchanges
    • Shanghai Stock Exchange (SSE) capitalisation $4 trillion, 4th largest globally
    • Hong Kong Stock Exchange $3.9 trillion, 5th largest globally
    • Shenzen Stock Exchange capitalisation $2.5 trillion, 8th largest globally

  • Chinese stocks
    • A shares: are listed on Shanghai and Shenzhen stock exchanges and priced in RMB
    • B shares: are listed on Shanghai and Shenzhen stock exchanges and priced in foreign currencies
    • H shares: shares of companies incorporated in mainland China which trade on the Hong Kong stock exchange
    • Red Chips: shares of mainland China state-owned companies incorporated outside but which trade on the Hong Kong stock exchange, e.g. China Mobile, there’s a list of Red Chip companies here
    • P Chips: the “P” stands for the private sector, and these are Chinese companies with operations in mainland China traded on the Hong Kong stock exchange but incorporated in the Cayman Islands, Bermuda and the British Virgin Islands
  • Stock Connect “A unique collaboration between the Hong Kong, Shanghai and Shenzhen Stock Exchanges, Stock Connect allows international and Mainland Chinese investors to trade securities in each other's markets through the trading and clearing facilities of their home exchange”

  • Has allowed foreigners to buy mainland China-listed shares
  • Part of the integration of China into global capital markets
  • Avoids China’s capital controls as described here by the US website export.gov:
    • “China maintains a "closed" capital account, meaning companies, banks, and individuals can't move money in or out of the country except in accordance with strict rules.”
    • “On December 30, 2016, China People’s Bank of China issued Measures for the Administration of Financial Institutions' Reporting of High-Value Transactions and Suspicious Transactions, with the goal of targeting money laundering, terrorism financing and fake outbound investment transactions.  As a result of the law, banks and other financial institutions in China have to report all domestic and overseas cash transactions of more than 50,000 RMB (approx. $7350), compared with 200,000 RMB (approx. $29,400) previously. Banks will also need to report any overseas transfers by individuals of $10,000 or more.  In addition, all banks must report to central government on every single foreign exchange transaction of at least $5 million. SAFE will supervise and halt any on-going ODI projects in which Chinese investors still need to transfer more than $50 million out of the country. Only once they have vetted the authenticity and legality of the company's ODI plans will the green light be given.”

This is tiny! 200 billion RMB = £22 billion = $28 billion, in 2018 the annual volume of shares traded in the US $33 trillion vs the annual volume of shares traded in China was $13 trillion according to the World Bank

  • Chinese indices
    • CSI 300 is a market capitalisation weighted index of the largest A-shares that trade on the Shanghai and Shenzhen exchanges. CSI is the acronym of the China Securities Index company that maintains the index.
    • FTSE China 50 contains the largest A-shares that trade on the Shanghai and Shenzhen exchanges
    • MSCI China contains the largest stocks that trade on the Hong Kong stock exchange but also B-shares, Red chips and P chips
  • Cheapest ETFs from JustETF (here) are


  • Franklin Templeton FTSE China ETF (here)
  • OCF is 0.19% which is very competitive for a China tracker
  • Tracks the FTSE China 30/18 Capped Index 
  • “FTSE China 30/18 Capped Index represents the performance of Chinese large and mid capitalisation stocks. The index has a broad coverage of Chinese share classes include A Shares, B Shares, H Shares, Red Chips, P Chips, S Chips and N Shares, where the A Share constituents are available to international investors through Northbound China Stock Connect Scheme, eligible under the scheme’s Buy-And-Sell List. The index constituents are weighted by free float, restrictions applied to foreign investors, and reviewed semi-annually. To limit over concentration in any single security, constituents are capped quarterly so the largest company’s weight does not exceed 30% and any remaining company weight does not exceed 18%.”

Could you please discuss quantitative methods for index investing?

  • My Great Aunt Lilian bet on horses which shared the same name as her dogs...
  • The idea behind quantitative methods is to choose stocks based on numerical criteria
    • Usually, this is done via a stock screen
    • Criteria based on fundamentals (valuation, earnings growth, return on equity), price changes (moving averages), volatility...
  • Factor funds or smart-beta funds are one example of this approach e.g.
    • Momentum (buy stocks that are rising)
    • Value (buy stocks that are cheap)
    • Growth (but stocks whose profits are growing strongly)
  • Other methods are
    • Risk parity (equal marginal risk contribution from each asset)
    • Minimum volatility (lowest risk or equivalently maximum diversification)
    • Maximum Sharpe ratio (largest risk-adjusted return)
  • Newer developments are to use machine learning techniques such as deep learning to identify stocks that will outperform

  • Methods include
    • Statistical arbitrage which extend the pair trade idea e.g. Ford Motors goes up 5% this week and GM goes down 5%, go long GM, short Ford Motors but market neutral. They should converge.
    • Equity market neutral goes long “good” stocks and short “bad” stocks so as to be neutral for the market as a whole and/or neutral other factors
    • Trend following e.g. momentum
  • An alternative is to buy pre-built quantitative indices
    • For example, MSCI World Growth screens stocks according to:
      • Long-term forward EPS growth rate
      • Short-term forward EPS growth rate
      • Current internal growth rate and long-term historical EPS growth trend
      • Long-term historical sales per share growth trend
    • MSCI has lots of these indices
  • Grew out of Benjamin Graham’s book “Security Analysis” first published in 1934 (here)

Where can I find less expensive CAPE rated countries that don’t have crippling fees?

  • justetf.com which is also found in our #frequentlyaskedquestions channel on Slack for PensionCraft Patreon supporters
  • Vanguard doesn’t have as many country-specific ETFs as Blackrock’s iShares range

How do you rate the Vanguard Lifestrategy 40% as a means of providing an income in retirement

  • The dividend yield of LifeStrategy 40 isn’t very high, just 1.4% as of November 17th 2019 but it’s
    • Diversified regionally and across asset types
    • Has low-ish capital risk
  • This means that if you invest £100 you’d earn about £1.40 per year.
  • There are other funds designed to provide high income, what varies is how much capital risk you have to take to produce the income i.e. how much will your £100 vary in value in percentage terms per year. If it falls just before you have to sell it that’s a problem.
  • Last week ​here​​​ I provided which ranks Vanguard funds according to their risk-adjusted yield i.e. which funds give the highest amount of income per unit of risk
    • LifeStrategy 40 came fifteenth in the list
    • The top six were all bond funds, mostly currency-hedged which reduces their risk by neutralising their currency fluctuations (volatility)
    • The US is the developed country with the highest yields at the moment so its government bonds and corporate bonds all have relatively good yields


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November 20, 2019