DB’s New ETF Offers Direct China Access
By Hung Tran | November 05, 2013
http://www.indexuniverse.com/sections/news/20373-dbs-new-etf-offers-direct-china-access.html
Deutsche Bank on Wednesday is launching a China-focused ETF that it says is the first U.S.-listed ETF to provide investors direct equity exposure to the world’s second-largest economy via the China A-shares market, in which foreign investment has historically been limited. Other China-focused ETFs use derivatives rather than direct access.
The db X-trackers Harvest CSI 300 China A-Shares Fund (ASHR) will provide U.S. investors with direct access to China A-shares. Other China-focused ETFs must do so indirectly via derivatives or other instruments, according to Martin Kremenstein, head of Passive Asset Management for Deutsche Asset & Wealth Management Americas. The fund will carry an expense ratio of .80 percent.
ASHR will track the CSI 300 Index, which includes the 300 largest and most liquid securities trading on the Shanghai and Shenzhen stock exchanges. Currently, the financials, industrial and consumer discretionary sectors make up the bulk of the index’s weighting.
Deutsche Asset & Wealth Management has partnered with Harvest Global Investments Limited, a wholly owned subsidiary of Deutsche Bank Group’s asset management joint venture in China—Harvest Fund Management Co. Ltd.—to launch the fund.
Harvest Global Investments Limited’s status as a renminbi qualified foreign institutional investor (RQFII) enables it to obtain a RQFII quota on behalf of ASHR. “This product is groundbreaking because it’s been granted RQFII quota,” said Alex Depetris, chief operating officer of Deutsche Asset & Wealth Management.
“We’re now able to develop with Harvest the first A-shares, U.S.-listed ETF. This is a market access story and we think it will be very well received by both retail and institutional investors who previously invested in China via swaps and H-shares,” he said.
A-shares are equity securities issued by companies incorporated in mainland China and are denominated and traded in China’s currency, the renminbi. The mainland market of securities that are listed in Shanghai and Shenzhen is considered to be the next great frontier of investing in China.
Controls imposed by the Chinese government currently limit direct investments in A-shares, so only a limited pool of foreign investors have been approved as qualified foreign institutional investors by the China Securities Regulatory Commission.
That said, one U.S.-listed ETF does access the A-shares market, the $32.1 million Market Vectors China ETF (PEK | F-32). Like Deutsche Bank’s proposed fund, PEK also tracks the CSI 300 Index. It gains its exposure to A-shares through an agreement with Credit Suisse, which has QFII status.
However, PEK indirectly accesses A-shares via derivative securities, again a reflection of restrictions China’s securities regulators impose on foreign investors. Thus, investors in PEK are exposed to the inherent risks of any equity investment plus so-called counterparty risks associated with use of over-the-counter derivatives.
Similarly, KraneShares has in registration the KraneShares Bosera MSCI China A Share Fund, and it’s looking to tap Bosera Asset Management as subadvisor and will attempt to use Bosera’s potential RQFII status to gain exposure to physical A-shares.
“I think this is actually a game changer and has potential to change the China investment landscape,” said Dennis Hudachek, an ETF analyst at IndexUniverse.
That said, Hudachek wonders how much of a quota the fund will invest with and, once that quota runs dry, if it will substitute A-shares with swaps and H-shares like its counterparts.