The ChiNext ETF’s assets have doubled to $44.9 million this year, while the Deutsche A-shares small-cap fund’s jumped 45 percent to $43.4 million. The Deutsche ETF that tracks the 300 biggest mainland-traded stocks has increased 21 percent to $1.2 billion.

Stocks in the small-cap ChiNext Index sell for an average 45 times projected 12-month earnings, compared with a multiple of 14 for the Shanghai Shenzhen CSI 300 Index of mainland stocks with the largest market capitalization and liquidity.

“There is a fair amount of doubt that the rally in these small-cap funds was driven solely by fundamentals,” Jay Jacobs, a research analyst in New York at Global X Funds, which manages about $4 billion in ETFs, said by phone on March 30. “There is a lot of concern that the small-cap stocks are now overpriced.”

Offshore ETFs

The rally in small-cap stocks was driven mostly by local investors, according to Balchunas. Foreign investors focus on more established industries including banking, insurance and commodities, he said.

ETFs that invest in Chinese stocks traded offshore, which are more accessible to foreign investors, have been lagging behind the onshore market. The iShares China Large-Cap ETF, the biggest China-focused ETF trading in the U.S., has gained only 8.6 percent this year, and the Guggenheim China Small Cap ETF has returned 6.5 percent.

The ChiNext Index has gained 63 percent this year, compared with a 17 percent advance in the CSI 300. Chinese brokerage Shenwan Hongyuan Group Co. last month predicted further gains in the ChiNext of as much as 28 percent.

“You’ve seen a lot of reforms around state-owned enterprises, but the authorities have also made it clear that they want smaller consumer-oriented enterprises to do well,” Brendan Ahern, managing director at Krane Fund Advisors LLC in New York, which oversees four Chinese ETFs, said by phone on March 30. “As a result, the funds that track these small-cap technology and consumer sector names are among the best performers this year.”
 

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