China stocks jump, but be careful how you invest

People have photos taken with a replica of the famous Wall Street bronze bull on the Bund in Shanghai.

Johanned Eisele | AFP | Getty Images

China stocks jumped the most in 15 months. What's up?

China's rose 3.1 percent overnight to a 3-year high. To be blunt, it's a bet on central bank easing, but it's a good time to highlight that China's domestic market—long inaccessible and given up for dead—has been revived in the second half of the year.

The Shanghai Index is up 31 percent this year, but you wouldn't know that if you were investing in conventional methods. There is a huge difference in the China ETFs that are available for U.S. investors.

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Simply put, the Chinese stock market is divided into two main segments: those shares that trade only in mainland China (known as A-Shares), and those that trade outside mainland China, including Hong Kong and the United States.

Because of restrictions on the ability of foreigners to own A shares, the mainland Chinese market often trades at a substantial discount—or a premium—to the China shares that trade outside the U.S.

Here's an example. The China Large-Cap ETF (FXI) is the largest Chinese exchange traded fund. It's up a paltry 3 percent this year.

Contrast this with the China A-Shares Fund (ASHR), which is up nearly 19 percent. Why the difference?

The difference is that this has been a year where mainland China has roared back, after years of underperformance, and ASHR has captured part of that comeback. FXI has not.

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The FXI owns only 30 large-cap securities that are traded outside mainland China. It's heavily concentrated in financials, which are about 50 percent of the portfolio.

ASHR is composed of roughly 300 securities that are entirely A-Shares listed on the Shenzen or Shanghai stock exchanges. Not only are they mainland China stocks, but the portfolio of stocks is much more diversified.

I recently noted that China's A-Shares are slowly being opened to the outside world. It is now possible to own A-Shares directly if you have a brokerage firm that has a Hong Kong trading license. That should narrow some of the strange price disparities. Mainland China is slowly joining the rest of the investment world.