High administrative expense ratios
By and enormous, options for Canadians in search of exposure to Chinese stocks are prohibitively expensive, even in comparison with mutual funds.
Take XCH for instance, with its high administrative expense ratio (MER) of 0.86%. The more specialized BMO MSCI China ESG Leaders Index ETF (ZCH) is not less expensive, with an MER of 0.67%. For a $10,000 investment, that is $86 and $67 in annual fees, respectively.
Now compare this to Canadian equity ETFs where fees could be as little as 0.05%, akin to the TD Canadian Equity Index ETF (TTP). That’s just $5 per 12 months for a similar $10,000 investment.
The MER is a relentless drain in your performance, especially in the long run. It’s a headwind you will feel 12 months after 12 months, so it’s value keeping it as minimal as possible.
Expensive trading costs
There is a Canadian-listed Chinese equity ETF that I would love: the CI ICBCCS S&P China 500 Index ETF (CHNA.B). With a lower MER of 0.59%, this fee remains to be on the high side but stays relatively competitive on this segment.
Unlike many competitors, the corporate holds the shares directly, thereby avoiding the second stage of the 15% US withholding tax abroad. This also includes exposure to China A-shares, that are domestically traded Chinese stocks not normally accessible to foreign investors – a notable advantage.
However, one issue keeps me skeptical: the bid-ask spread. As of Dec. 5, CHNA.B had a bid price of $22.79 and an ask price of $22.86, a diffusion of $0.07, or about 0.31%.
ETF liquidity is influenced not only by trading volume but in addition by the liquidity of the underlying assets. This is why Canadian and U.S. large-cap stock ETFs often have extremely tight spreads, even when volume is low – the underlying stocks are very liquid.
