China Bond ETF Race Heats Up

by on July 21, 2011 | ETFs Mentioned:

Van Eck has joined an already long list of ETF issuers with plans on bringing funds offering exposure to China’s fixed income market to the U.S., recently filing details on two proposed “Greater China” bond ETFs. Each of the proposed ETFs would offer exposure to the Greater China region, a group that includes corporations located in China, Hong Kong, and Taiwan. Hong Kong is one of two Special Administrative Regions to China, maintaining a “high degree of autonomy” in all matters not involving foreign relations or military according to its constitution (Macau is the other SAR). A relatively small city-state, Hong Kong is a developed market that maintains a unique stock market and political system from China.

Taiwan, officially known as the Republic of China, is a sovereign state that has historically been divided over the prospect of independence from the mainland. Taiwan’s status varies depending on the organization making the classification; the economy is considered to be developed by the IMF, but emerging by index providers such as MSCI (explaining the hefty allocation afforded to Taiwanese stocks in VWO and EEM).

The new products under development include:

  • Market Vectors Greater China Corporate Bond ETF: This ETF would include corporate bonds issued by corporations in the Greater China region, including debt denominated in both the U.S. dollar and local currencies. Companies listed on exchanges in China, Hong Kong, or Taiwan would be eligible, as would entities that generate at least half of their revenue from that region.
  • Market Vectors Greater China High Yield Bond ETF: This ETF would invest in debt rated below investment grade and issued by companies located in the Greater China region, giving investors an opportunity to tap into high yield debt overseas. The existing ETFs in the High Yield Bond ETFdb Category all focus primarily on securities issued by U.S. securities (Van Eck had previously filed for a more broad-based International High Yield Bond ETF).

No expense ratios or ticker symbols were included in the SEC filings.

China Bond ETFs On The Horizon

Van Eck becomes at least the fourth ETF issuer to lay the groundwork for what would be the first China bond ETF. WisdomTree recently sketched out details on an actively managed China Local Debt Fund, and earlier this year Guggenheim made a filing about a China Yuan Bond Fund. PowerShares has also begun the process of launching an Asia Pacific Bond Portfolio that would focus on bonds denominated in yuan.

Currently, options for gaining exposure to Chinese debt are limited. The funds in the Emerging Markets Bonds ETFdb Category include some China exposure along with several other markets. Last month, Guinness Atkinson debuted a Renminbi Yuan & Bond Fund (GARBX), a mutual fund that focuses on debt and cash instruments denominated in the Chinese currency. This suggests that the demand for such a product by Van Eck could be huge, especially considering the recent successful launches of the company’s Latin American (BONO) and Emerging Market (EMLC) debt funds [see Highlighting International Bond ETFs].

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Disclosure: No positions at time of writing.