The Guide To China Bond ETFs - ETF News And Commentary
January 24 2012 - 5:41AM
Zacks
Although the Chinese economy is apparently slowing down—to a
rate of ‘just’ 8.9% in the most recent release—some investors
remain relatively bullish on the economy. These investors point to
the country’s massive reserves and still small consumer economy as
two areas which, if unlocked, should help the country avoid a hard
landing in the near term. Yet given the huge risks to the Chinese
property market, and worries over more spending which could stoke
inflation, reservations over Chinese stocks could keep many out of
the space for the time being.
In light of these trends, some who are still looking to gain
exposure to the Chinese market but are looking to avoid equities
could be better served by taking a closer look at the Chinese bond
market instead. While the Chinese bond market remains closed off to
most foreign investors, what is known as the ‘Dim Sum’
market—securities that trade in Hong Kong and are denominated in
yuan—is open to Western investors (also read Forget FXI: Try These
China ETFs Instead).
In addition to providing greater transparency by trading out of
Hong Kong, this market could also give investors a number of other
advantages for their portfolios. First, and most importantly, these
securities could offer up exposure to China but with lower levels
of risk, a huge selling point given the uncertain near term outlook
for the country. Additionally, while Chinese stocks have developed
high correlations with other emerging markets and even developed
markets, the China bond market has not. This is largely due to the
small size of the Dim Sum segment and the fact that major
institutional investors are unable to dominate the space at this
time. Lastly, since the products are denominated in yuan, these
products could also offer up an easy way for investors to play a
rising Chinese currency or to diversify out of dollars in the bond
space (see Five ETFs To Buy In 2012).
While buying individual securities is still pretty hard in this
sector, investors now have three China bond ETFs available for
purchase. All three of these funds have debuted in the past year
and look to track similar indexes that cover fixed income
securities in this market. However, while many of the securities
are similar and all track Dim Sum bonds, there are several key
differences that investors should be aware of. Below, we briefly
outline these three funds and highlight some of the variations
between the products in the China bond ETF market:
PowerShares Chinese Yuan Dim Sum Bond Fund (DSUM)
This ETF looks to follow the Citigroup Dim Sum Bond Index which
includes a variety of bonds from a number of sources including;
governments, agencies, supranationals, and corporations. The bonds
included are generally fixed rate securities and have a minimum
maturity of one year and a minimum size outstanding of one billion
yuan. Currently, the portfolio consists of 35 securities and the
fund charges investors 45 basis points a year in fees (see Go Local
With Emerging Market Bond ETFs).
In terms of individual holdings, the fund is pretty spread out
with all securities in the top ten receiving at least 2.7% of
assets. However, the top holding, which goes to Chinese government
bonds due in 2016, receives a 10.6% weighting, roughly equal to the
rest of the top five combined. Investors should also note that
roughly 40% of the fund is rated at least ‘A’ by S&P while
another 44% isn’t rated at all. This suggests that although the
fund may have a tilt towards quality securities, there is decent
exposure to the unknown as well. Thanks in part to this, DSUM pays
out a 30 Day SEC Yield of 4.5%, a level that is pretty good
considering the effective duration is below 2.9 years.
Market Vectors Renminbi Bond Fund (CHLC)
The newest entrant in the space is from Van Eck with its CHLC, a
fund that tracks the Market Vectors Renminbi Bond Index. This
benchmark looks to give exposure to Chinese Renminbi-denominated
bonds that are investable to market participants outside of
Mainland China. This focus gives a fund that holds 27 securities in
total and charges a rock-bottom expense ratio of just 39 basis
points a year (after fee waivers of 11 basis points a year).
CHLC’s holdings appear to have a more global tilt than some of
its peers in the space as just 62% of the securities are from
Mainland China. The rest are divided up among a number of developed
markets which have firms that are looking to issue bonds in yuan
including those from Hong Kong, U.S., Germany, and Singapore. Top
individual issues include Germany’s Bosch, Bank of Commerce from
China, HKCG Finance, and America’s Caterpillar Financial Services
Group to round out the top four (read Time To Get Regional With
Bond ETFs).
With this international focus, the fund finds itself in the
middle of its counterparts in terms of a number of statistics
including yield as CHLC pays out 2.5% in 30 Day SEC Yield terms.
However, with the fund’s heavy focus on lower risk securities and
the large weightings to foreign companies, the product may not be
the best proxy for Chinese bonds but could be a lower volatility
play on the Dim Sum market.
Guggenheim Yuan Bond ETF (RMB)
The third ETF targeting the space is from Guggenheim which
tracks a ruled-based index called the AlphaShares China Yuan Bond
Index. This benchmark includes bonds denominated in Chinese yuan
regardless of who issued them—be it Chinese or non-Chinese
issuers—and that are traded in the secondary market. This produces
a fund with roughly 20 securities in total that charges 65 basis
points a year in fees (read Do You Need A Floating Rate Bond
ETF?).
For holdings, RMB is pretty skewed towards its top three
holdings which constitute 51.3% of the total. Of these top
holdings, two are lower risk quasi-government bonds from China as
the China Development Bank and the Export Import Bank of China take
up spots two and three, respectively. This leaves the biggest chunk
in Chinese renminbi—the currency of the country—to make up over
one-third of total assets. Obviously, this produces a heavily
concentrated, but lower risk, holdings profile than some of its
peers in the space, but it also gives the fund a dividend of about
1% and a duration of just 1.9 years.
Category
|
DSUM
|
CHLC
|
RMB
|
Total holdings
|
35
|
27
|
20
|
Yield
|
4.5%
|
2.5%
|
1.0%
|
Duration (years)
|
2.9
|
2.4
|
1.9
|
AUM (millions)
|
$5.9
|
$5.1
|
$5.0
|
Rated AA (S&P)
|
24%
|
37% (AA & AAA)
|
30% (AA-)
|
Expenses
|
0.45%
|
0.39%
|
0.65%
|
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