Are you an institutional investor who's uncomfortable with investing in China, but still wants portfolio exposure?
Increasingly, U.S.-China geopolitical tensions, President Biden's executive order banning some technology investments and worries about funding military capabilities have tied the hands of institutional investors.
So niche products such as CoreValues Alpha Greater China Growth ETF, ticker CGRO, are stepping into the breach and offering stripped-down vehicles that aim to address these worries.
"From many investors, we have heard that they're not comfortable investing in China, or that they're worried their capital will be used to build a product that's got military applications, like building chips for a guidance system for the PLA (People's Liberation Army)," said Ben Harburg, founder of CoreValues and a managing partner at MSA Capital..
He's an American who's been living in China for many years and created the ETF as a way to thread the needle for concerned institutions.
"Our investors are worried they're aiding human rights abuses and generally aiding an enemy. We saw there was no ETF washing every investment with this rinse of whether it contravened American values and political sensitivities," he said.
CGRO, for example, would not hold a company such as Baidu, a mainstay of Chinese internet search and online marketing. "We wouldn't touch that in this ETF," since Baidu also is involved in AI and surveillance for Chinese military use.
So Harburg, whose firm until now has run $1.7 billion in assets through private funds only, launched the publicly traded ETF last week. The fund, which charges 0.75% of assets annually, competes with rivals such as Krane Shares, BlackRock's iShares and other ETFs focused on China. Most are passive and tied to indexes, and don't screen companies for Chinese military ties, repression of civil liberties and susceptibility to U.S. sanctions.
Harburg has years of experience at MSA Capital, a venture fund based in Beijing with funds that have invested in everything from Chinese gene sequencing, mobility and SaaS companies to the country's consumer internet sector. Notable portfolio companies in which he's invested include Chinese shopping platform Meituan, taxi booking app Didi and Beijing Genomic Institute. MSA's investor base includes the founders of top technology companies in China as well as Western retirement plans.
He founded Core Values Alpha as a brand of the RIA PowerFunds. MSA Power Funds is the subadvisor to the new ETF.
Besides political concerns, China has matured as a market, and investors are worried about an economic slowdown. Domestic financial conditions have meaningfully tightened since September due to the Bank of China's reluctance to further ease monetary policy. Surging U.S. bond yields and the selloff in U.S. equities have also exacerbated bearishness over Chinese and emerging markets assets.
That said, "this isn't a democracy ETF" such as the Freedom 100 Emerging Markets ETF or LBRTY, a mutual fund, Harburg said.
Life + Liberty operates the freedom 100 Emerging Markets ETF, ticker FRDM, which ranks companies inside of countries based on how they fare on issues of political and economic freedom and does not invest in autocracies such as Russia or China. France-based asset management firm TOBAM is raising money for LBRTY, its new mutual fund strategy that limits the risk of exposure to countries with autocratic risks.
"We acknowledge China's not perfect. It's still growing at twice U.S. GDP, and it's going to be one of the biggest markets indefinitely. But we can offer people a safety wrapper around it."
