Invesco bucks trend with launch of first European ChiNext 50 ETF

Invesco is launching the first European exchange traded fund tracking China’s tech-heavy ChiNext 50 index, in a rare western vote of confidence in the world’s second-largest economy.

The listing comes as closures of China-focused ETFs have risen to a record level, with investors and fund houses recoiling from years of poor stock market performance and rising geopolitical frictions that have led some to question the ethics of investing in the increasingly authoritarian state.

Fund managers globally scrapped 18 China ETFs in the first quarter of 2024, more than half of last year’s record total of 34 closures, according to data from Morningstar Direct, with Global X, Xtrackers and KraneShares among those wielding the axe.

The rate of launches has also slowed sharply, with just 33 China ETFs unveiled in Q1 — all but three of them domiciled in either China or Taiwan. This compares with 160 launches during calendar year 2023 and a record 291 during the peak of Sino mania in 2021.   

Poor performance has been a key driver of souring sentiment, with China’s blue-chip CSI 300 index still 39 per cent below its peak of February 2021 — despite robust intervention by Beijing’s “national team” of state-backed institutions, which ploughed Rmb410bn ($56bn) into domestic equity ETFs in the first two months of 2024 alone, according to calculations by UBS.

Chris Mellor, head of Emea equity ETF product management at Invesco, disputed any notion that this meant Chinese stock prices were being propped up at artificially high levels, arguing instead that they were now cheap.

“Multiples are only marginally above the lowest that we saw in 2019, at 20 times forward earnings,” Mellor said. “They had traded as high as 40-50 times in 2020/21. China looks cheap, rather than expensive, in terms of other markets.”

The Invesco ChiNext 50 Ucits ETF (CN50) will invest in 50 of the largest and most liquid securities among the 1,300 listed on the ChiNext market of China’s mainland Shenzhen stock exchange.

This gives it an innate sector skew: at launch about 90 per cent of its weight will be in technology, industrials, healthcare and financial stocks, Mellor said, with no exposure to real estate, energy, utilities or consumer stocks.

The largest holdings at launch will be Contemporary Amperex Technology Co (CATL), the world’s largest maker of electric vehicle batteries, followed by Shenzhen Mindray Bio-Medical Electronics and East Money Information.

“The ChiNext board was launched in 2009 to encourage innovation,” Mellor said. “The fundamental story is one of growth. Every year it has delivered stronger earnings growth than the broader Chinese market.

“R&D spending as a proportion of operating revenue averages 6-7 per cent. For the CSI 300 average it is below 2 per cent,” he added.

Despite that, performance has been soft. The ChiNext 50 has risen 33 per cent since launch in June 2014 (undershooting the 65 per cent of the CSI 300 over the same period) and actually peaked as far back as June 2015, since when it has fallen 55 per cent. In comparison, Wall Street’s S&P 500 has risen 180 per cent during the past decade.

Mellor remained upbeat, though.

“The performance of the market has been particularly painful for those investors that stuck with it. The expectation is that will turn around and normalise. Markets go through cycles,” added Mellor, who believed the incipient global rate-cutting cycle could help propel an upswing.

“We view product development as a long-term game. China has been out of favour for some time but that does not necessarily mean it will stay out of favour in the future.”

Others may question the ethics of investing in a Chinese fund focused in large part, on artificial intelligence, electric vehicles, renewable energy, robotics, automation and biotech.

In December, for instance, US power utility Duke Energy disconnected batteries made by CATL at a US Marine base camp amid pressure from politicians fearing national security threats from Chinese government links. CATL denied the accusations.

Mellor said such issues were “a decision that the investors in the fund have to make”, but pointed out that China was “still part of the investable universe” and a large weighting in emerging market funds.

Kenneth Lamont, senior fund analyst for passive strategies at Morningstar, viewed the launch of the ETF as “a bit strange”, adding “it’s not even the greatest idea [for an index].

“It’s 50 stocks. We don’t look favourably on the equivalents, eg the Euro Stoxx 50 as an investment proposition. They are very skewed to a small number of large stocks.”

However, Lamont thought the timing was potentially interesting.

“The China story has been very negative for some time now. In a way it makes sense as an investor to buy things that are out of favour. It’s just not usually the way it works, launching after the hype cycle,” he said.

“We don’t often get big players launching products into unfavourable markets.”

Invesco currently has four China-focused ETFs, although their combined assets come to just $119mn.

The new ETF, launched as part of a collaboration with Great Wall Securities, its Chinese joint venture partner, will list on the London, Milan, Frankfurt and Zurich stock exchanges with an annual management fee of 0.49 per cent.