(Bloomberg) -- Most stock investors would be thrilled with an 80% return in the past year. For those who bought BlackRock Inc.’s flagship ETF for mainland Chinese shares, however, it’s akin to getting shortchanged.

The $9.1 billion iShares FTSE A50 China Index ETF, an exchange-traded fund designed to track returns of the 50 largest companies traded in Shanghai and Shenzhen, has underperformed its benchmark by a whopping 29 percentage points on a total return basis over that span.

The cost to investors? More than $900 million in unrealized gains, according to data compiled by Bloomberg.

ETFs such as BlackRock’s, which popularized the use of complex derivatives as a way for foreigners to tap into China’s growth potential, are now becoming unintended casualties as the nation opens up its capital markets. As more foreigners gain direct access to yuan-denominated A shares on mainland bourses, demand for the derivatives has plunged. That’s unmoored the ETFs from their benchmarks and robbed investors of returns.

“It’s not providing what it advertised to do,” Ajay Mehra, the head of equities at Salient Partners LP, which oversees $27 billion, including FTSE A50 China Index ETF shares, said by phone from New York. “This tracking error has led to substantial underperformance over the past year, which makes it less attractive as an access vehicle.”

DISCOUNT WIDENS

Started in 2004, the iShares A50 ETF was the first to use derivatives instruments to offer overseas investors exposure to mainland stocks market, which were virtually off-limits to foreigners at the time. Its assets ballooned, helping the fund to become the largest of its kind.

For investors in the ETF, things started to unravel last year. That’s when China announced in November that it would link the Shanghai stock exchange to Hong Kong’s and allow 23.5 billion yuan ($3.8 billion) of cross-border trades each day.

The move came three years after China took a major step to open its capital markets with a program known as RQFII.

Before the November announcement, the iShares A50 ETF consistently traded at a premium to its underlying exposure, resulting in a market capitalization higher than its net asset value. Since then, a discount has emerged and widened to 11.5% last week, data compiled by Bloomberg show. That’s the most since 2007. It was 8.7% on Monday, when investors pulled the equivalent of $462 million from the fund, the biggest outflow since July 2009.

EXPENSIVE DERIVATIVES

“We have observed that the opening of the Shanghai-Hong Kong stock connect has contributed to pricing dislocations across financial instruments connected with accessing China, including our A50 ETF,” Melissa Garville, a spokeswoman for BlackRock in New York, said in an e-mail.

The link to Hong Kong, together with expectations of monetary stimulus, has helped push up the Shanghai Composite Index by 30% this year, after it surged 53% in the biggest gain among major indexes tracked by Bloomberg in 2014. The Shanghai Composite rose 1.8% on Tuesday, while the A50 ETF climbed 3.6%.

Hong Kong’s bourse link is also sapping demand for costly derivatives, known as China A-share access products, or CAAPs, and causing funds that use them to underperform. While the the iShares A50 ETF is buying more shares directly, the derivatives still make up about 81% of the fund.

NO MARKET

BlackRock’s not the only one affected. The $1.1 billion Wise - CSI 300 China Tracker, an eight-year-old derivative-based ETF issued by BOCI-Prudential Asset Management Ltd., fell to a record 11.1 % discount to its net asset value Monday. And the $926 million closed-end Morgan Stanley China A Share Fund, created in 2006, is trading at a discount of almost 20 %, the widest since 2008.

“Who needs a derivative with some bank when you can go buy stocks directly?” said Eric Balchunas, a Bloomberg Intelligence analyst, said. “There’s no market anymore” for those ETFs.

While the iShares A50 ETF suffered withdrawals of $3.8 billion this year, some investors still prefer the fund because it’s easy to trade. Its average 30-day trading volume is more than all but three stocks in the 50-member Hang Seng index.

“For people who don’t want to have liquidity issues, this might be the place to go,” Walter Price, a senior fund manager at Allianz Global Investors, which manages $493 billion, said by phone from San Francisco.

The cost of the derivatives-based ETFs alone may be enough to dissuade many investors as China becomes more accessible.

The iShares A50 ETF has a 1.39% expense ratio, which includes BlackRock’s management fee as well as trustee, custodian and administration fees. That’s higher than 97% of ETFs worldwide and doesn’t include variable expenses including the cost of CAAPs or collateral required to protect against counterparty risk, data compiled by Bloomberg show.

“Paying extra as a fee for access made sense” when you couldn’t access the market, said Jonathan Masse, chief investment officer of San Francisco-based WaveFront Capital Management Partners, which manages $10 million in emerging stocks. “People don’t need derivative-based funds anymore.”

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.