Thoughts about investing in China Market - ETF selection


Key considerations in China ETF Selection
To continue off my previous post, I was researching on key considerations for ETF selection as I am interested in getting exposure to China market. I am working with the assumption that China market is difficult to navigate. Investing in China involves political risk (CCP social credit rating and key personnel risk) , potential shortcomings in financial disclosure (China Hustle), potential issue with investor protection rights (S-Chips repatriation issue) and growing pains (economic slowdown). Even though I am optimistic about the government's plan to clean up crime and misconduct in the long run, I am uncertain whether foreign investor rights will be sufficiently protected.  As such, as a know nothing investor, I will prefer a sufficiently diversified approach to manage these risks. 


I am not familiar with the top performing active managed funds in China, and believe that the best approach is to simply buy and hold an index fund / low cost ETF and riding on the general upside of China's growth story. Unsurprisingly, most of the global world ETF has an inordinate skew towards the US market which is overvalued for the longest of time, and I will prefer direct exposure to China market. Research at ETFDB has revealed up to 52 china ETF, which led me to the conclusion that ETF selection is not as straightforward as I thought. This is simply a collation of my individual thoughts and does NOT constitute as investment advice.

1) Selection and weighing methodology
Concept
Expense ratio
Market Cap Approach
Big companies have certain factors that make them stable and strong. Buy more. Momentum effect.
General lowest portfolio turnover and lowest expense.
Equal weighted approach
Buying more of the big companies at a more expensive price is irrational. Sell the expensive stocks and buy more of the cheap for re-balancing.  
Potentially higher returns than largest Market Cap methodology. But  Higher portfolio turnover and expense.
Fundamental weighted approached
Focus on contrarian effect and fundamental metrics to buy cheapest stocks
Possible highest portfolio turnover and expense as some stocks are to be sold after they have been revalued by market.


2) Sound Fund mandate with track record,  and low tracking error

Strong preference over ETF with direct holdings of underlying securities. Stay away from derivatives based tracking as they have non visible counter-party risks.

3) Broker / Custodian selection and counter-party risk

As investing in index funds involves holding periods of years and decades, it make sense to find custodians with low / zero custody fees for ETF. It will also be important to find a sound and robust counterparty so that the ETF will NOT go bust under stress or distressed market conditions.


4) Examining the large exposed Holdings Concentration risk)
 As I have a personal dislike for the accounting integrity of specifically Alibaba holdings, I will only shortlist ETFs that specifically DO NOT hold Alibaba as a majority holdings. After that, I have a slight preference for equally weighted methodology with a lower expense ratio. I am open towards exposure of China small cap as well as Large Cap.

Shortlisted candidates
Due to formatting issues, a print-screen of my Excel will be utilized for record-keeping purposes. My ETF decision has not been finalized and I shall take some time to choose the more appropriate low cost ETF before making the long term buy and hold decision.











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