Invesco bucks trend by launching Europe’s first ChiNext 50 ETF

Invesco is launching Europe’s first 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 China-focused ETF closures rise to record levels and as investors and fund companies push back against years of stock market slumps and growing geopolitical friction that have led them to question the ethics of investing in an increasingly authoritarian China.

Fund managers globally eliminated 18 China ETFs in the first quarter of 2024, more than half of the record 34 eliminations last year, according to Morningstar Direct data, with Global X, Xtrackers and CraneShares among the eliminations.

The pace of listings has also slowed sharply, with just 33 China ETFs listed in the first quarter, all but three of which were domiciled in China or Taiwan. That’s a far cry from the 160 listings in calendar 2023 and the record 291 in 2021, at the peak of the China boom.

Despite strong intervention by Beijing’s “national team” of state-backed institutions, which pumped 410 billion yuan ($56 billion) into domestic equity ETFs in the first two months of 2024 alone, China’s blue-chip CSI300 index remains 39% below its February 2021 peak, with poor performance being the main driver of the deterioration in sentiment, according to UBS calculations.

Chris Mellor, head of EMEA equity ETF product management at Invesco, disagreed that this meant Chinese stocks were artificially inflated, arguing they were currently cheap.

“Price-to-earnings multiples are just above 20 times forward earnings, which was at its low point in 2019,” Mellor said. “In 2020/21 they were trading at as high as 40-50 times. Relative to other markets, China looks cheaper than expensive.”

The Invesco ChiNext 50 Ucits ETF (CN50) invests in 50 of the largest and most liquid stocks out of the 1,300 listed on the ChiNext market of the Shenzhen Stock Exchange in mainland China.

This gives the fund an inherent sector bias: At launch, Mellor says, about 90% of the fund’s weighting will be in technology, industrial, health care and financial stocks, with no exposure to real estate, energy, utilities or consumer stocks.

The stock with the largest number of holdings at the time of listing is Contemporary Amperex Technology Co (CATL), the world’s largest maker of electric vehicle batteries, followed by Shenzhen Mindray Biomedical Electronics Co and East Money Information Co.

“The ChiNext board was founded in 2009 to drive innovation,” Mellor said. “The fundamental story is growth. Every year, we’ve delivered higher revenue growth than the entire Chinese market.”

“R&D expenditure as a percentage of operating revenue averages 6-7%. The average for the CSI300 companies is less than 2%,” he added.

Despite that, performance has been weak: The ChiNext 50 is up 33% since its inception in June 2014 (below the 65% performance of the CSI300 over the same period), and actually peaked in June 2015 and is down 55% since then. By comparison, Wall Street’s S&P 500 is up 180% over the past decade.

But Mellor remained optimistic.

“The market’s performance has been particularly painful for investors who hung on to it. Things are expected to turn around and normalize. Markets are cyclical,” Mellor added. He believes the start of a global rate-cutting cycle could be a driver for the upside.

“We view product development as a long-term endeavor. China has been unpopular for a while, but that doesn’t necessarily mean it will remain unpopular in the future.”

Some may question the ethics of investing in a Chinese fund that is primarily focused on artificial intelligence, electric vehicles, renewable energy, robotics, automation and biotechnology.

For example, in December, U.S. power company Duke Energy stopped supplying CATL batteries to a U.S. Marine Corps base camp after pressure from politicians concerned about national security threats due to ties to the Chinese government, a charge CATL denied.

Mellor said such questions are “something that fund investors have to decide,” but noted that China is “still part of the investment universe” and accounts for a large weighting in emerging markets funds.

Kenneth Lamont, senior fund analyst for passive strategies at Morningstar, deemed the ETF’s launch “a bit odd,” adding that it’s “not even the best idea.” [for an index].

“It’s 50 stocks. I don’t like investing in something like the Euro Stoxx 50 because it’s biased towards a small number of large caps.”

But Lamont thought the timing could be interesting.

“The situation in China has been very negative for a while now. As an investor, it makes some sense to buy out-of-favor stocks, but selling after a hype cycle usually doesn’t work,” he said.

“It’s not often that a large company puts a product into a disadvantaged market.”

Invesco currently has four China-focused ETFs with total assets of just $119 million.

The new ETF is being launched as part of a collaboration with Chinese joint venture partner Great Wall Securities and will be listed on the London, Milan, Frankfurt and Zurich stock exchanges with an annual management fee of 0.49%.