First China Bond ETF Debuts: RMB Taps “Dim Sum” Market

by on September 22, 2011 | ETFs Mentioned:

Guggenheim has apparently won the race to launch the first U.S.-listed ETF offering pure play exposure to the Chinese bond market, debuting its China Yuan Bond Fund (RMB) on Thursday. The new ETF, which launches as a handful of other issuers have already laid the groundwork for similar products, will seek to replicate the AlphaShares China Yuan Bond Index. That index consists of about 37 debt securities that are eligible for investment by international investors and are denominated in Chinese yuan.

The underlying index does not consist of securities traded in mainland China; rather, the components of RMB are part of the “Dim Sum” bond market. Those securities are denominated in yuan and generally issued by Chinese entities in Hong Kong, making them accessible to international investors. So RMB brings U.S. investors about as close to Chinese debt as is currently possible, but it won’t put them on the same footing as those within the country.

In terms of the fund’s breakdown, RMB will charge investors 65 basis points in fees, putting it at the high end of costs for funds in our Emerging Markets Bonds ETFdb Category. Investors should also note the credit breakdown of the fund as more than half of the bonds in this ETF are not rated by S&P. With that being said, about 30% receiving a rating of at least ‘A+’ from the agency while about 17% of assets go to bonds that are rated between ‘A’ and “BBB”. Thanks to this breakdown, investors may have a hard time judging the true credit risk of the securities in the fund, making a large allocation to the product unwise for most investors.

With that being said, RMB does do a great job in spreading assets around a variety of sectors in the economy. Banking bonds, which often dominate such funds, make up a reasonable 27% of total assets, and are closely trailed by a 25.7% weighting to corporate. To round out the portfolio, 22.5% goes to teach of national government and government agency bonds, helping to give the fund a nice split between sovereign and company obligations [see International Bond ETFs: Cruising Through All The Options]. 

Market Interest

Thanks to ultra-low interest rates across much of the developed world, many investors have sought to expose themselves more to bonds in emerging markets. Many of these countries pay out yields far higher than their Western counterparts while, at the same time, offering low levels of risk thanks to solid fundamentals.  As a result, demand for emerging market bond ETFs has been huge, especially in the local currency space where assets are quickly approaching the $2 billion mark for just three funds. In terms of more specialized products, these have also seen high levels of interest from investors, especially WisdomTree’s Asia Local Debt Fund (ALD), which until now, was arguably the best way to gain some exposure to the China bond market [see more on ALD's Fact Sheet].

ALD launched in March of this year and has already accumulated an impressive $650 million in the short time period, further underscoring the demand for local emerging market debt. In terms of holdings, China makes up a top 10 allocation, barely, coming in at about 5.7% of total assets, while the top spots are instead dominated by Southeast Asian and developed markets in the region as Indonesia, South Korea, Australia, Thailand, and Singapore all make up about 11% of the portfolio. 

To give investors some idea of what RMB might payout, note that ALD has a current 30 Day SEC Yield of 2.2%. While this is obviously not the best proxy in the world– ALD has higher rated and higher duration securities from a host of markets– it is arguably the closest benchmark we have. Investors should also note that according to coupons listed on RMB’s fact sheet, most of the top components have coupons of between 2.1 and 3.3, although there are some outliers including a 1.0 coupon in a China Government Bond issue and a 6.34 coupon from the China Development Bank. No matter what the actual yield ends up being, the fund is likely to see huge inflows and interest from investors who have been starved for other ETF options in the emerging market bond space and very eager to gain more access to this economic giant [Pro Members can see our China ETF Report here].

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Disclosure: No positions at time of writing.