Investors continue to embrace exchange-traded funds as the preferred means of tapping into emerging markets due to their easy-to-use and cost-efficient nature. When it comes to accessing China, however, there are numerous nuances that make it challenging for U.S. investors to dip their toes into the nation’s lucrative equity market.
Martin Kremenstein, America’s Head of Passive Asset Management at Deutsche Asset & Wealth Management, recently took time to discuss the China A-Shares fund with us, which offers unique exposure to one of the world’s most compelling asset classes [see 101 ETF Lessons Every Financial Advisor Should Learn].
ETF Database (ETFdb): What was the inspiration behind creating the db X-trackers Harvest CSI 300 China A-Shares Fund (ASHR )?
Martin Kremenstein (MK): The China A-shares market has long been recognized as a distinctive investment opportunity. In fact, A-shares are one of the world’s most coveted investment opportunities, representing access to the world’s second-largest economy and yet notoriously difficult for foreign investors to access. So we definitely recognized investor demand. We were also in a unique position to access A-shares by virtue of Deutsche Bank’s relationship with Harvest Global Investors [see our ETF Country Exposure Tool].
The result is ASHR – the first U.S.-listed ETF that invests directly in China A-shares. The fund’s initial capital investment of $108 million illustrates the groundbreaking nature of this product and the pent-up demand for direct exposure to mainland Chinese equities. The fund seeks investment results that correspond generally to the performance of the CSI 300 Index, which is composed of the 300 largest and most liquid stocks in the China A-share market trading on the Shanghai and Shenzhen Stock Exchanges.
ETFdb: Tell us about Deutsche Bank’s decision to partner with Harvest Global Investments?
MK: Our relationship with Harvest dates back to 2005, when the bank made a strategic investment in Harvest Fund Management, the second-largest asset management firm in China. Harvest Global Investments Limited is a wholly owned subsidiary of Harvest Fund Management.
This joint venture put Deutsche Asset & Wealth Management (DeAWM) in a position to partner with Harvest Global Investments, which holds a Renminbi QFII license (RQFII).
Under current regulations in China, foreign investors can invest in the domestic Chinese securities market only through certain foreign institutional investors that have obtained status as a Qualified Foreign Institutional Investor (QFII), or a Renminbi Qualified Foreign Institutional Investor (RQFII), from the China Securities Regulatory Commission. Harvest received RQFII status, which allowed for this landmark product to be developed.
With the launch of ASHR, DeAWM opens up direct access to one of the most coveted markets in the investment world. U.S. investors have the opportunity to diversify their equity portfolios with China’s top equities.
ETFdb: How does ASHR differentiate itself from existing ETFs that also target China’s equity market?
MK: ASHR is the first ETF to provide U.S. retail investors direct access to China A-shares. At present, all other ETFs that invest in Chinese equities gain exposure through other means, such as swaps and derivatives. Since DeAWM was the first firm to receive RFQII status through its relationship with Harvest, ASHR is currently the only ETF listed in the U.S. that can invest directly in A-shares.
MK: ASHR is the only U.S.-listed ETF available to U.S. investors that invests directly in A-Shares. While market risk is obviously a factor, ASHR eliminates the additional inherent risks related to instruments like swaps and derivatives. ASHR also provides more access to domestically-focused companies than H-Share-based products such as FXI and GXC.
ETFdb: Aside from favorably positioning yourself to take advantage of China’s growth, what else might investors find appealing about adding ASHR to their portfolios?
MK: With a gross domestic product (GDP) of approximately $8 trillion, China is one of the world’s fastest growing major economies, with growth rates averaging 9% over the past 30 years. Moreover, we see a number of factors that could support the Chinese economy over the long term. Structural factors, such as growth in consumption and urbanization, are likely to support economic growth for quite a while. In addition to the Chinese equity market’s significant upside potential, it offers historically low correlation to major markets in Europe or the United States.
The A-share market also offers a broader opportunity set than other Chinese investment markets like H-shares. Many sectors and companies in China are only available via China A-shares, meaning the ability to invest in China A-shares opens up a broader investing universe.
The Bottom Line
Investing in China has long been regarded as one of the most attractive opportunities out there for those with a long enough time horizon and a stomach for volatility. The China A-Shares Fund (ASHR ) from Deutsche Bank is a one-of-a-kind offering that warrants a closer look from anyone looking to access a corner of the nation’s market that has long been closed off to foreign investors.
Disclosure: No positions at time of writing.