Van Eck Launches Dim Sum Bond ETF

by on October 12, 2011 | ETFs Mentioned:

Van Eck beefed up its lineup of international bond ETFs today, rolling out a product focused on Chinese debt traded in the “Dim Sum” bond market in Hong Kong. The new Market Vectors Renminbi Bond ETF (CHLC) will seek to replicate an index comprised of investment grade debt that is denominated in renminbi and available to investors outside of China. So-called Dim Sum bonds are a relatively new innovation, and a significant expansion in the market in recent years has made it possible for international investors to gain exposure to the Chinese currency through debt issued in the local currency. 

Betting On The Yuan

The last few years have seen significant developments in the Chinese currency market, as Beijing has gradually moved to ease what many in the international community have historically viewed as an artificially cheap currency. A cheap currency makes Chinese goods appealing to international consumers, thereby boosting the health of the Chinese export market. The renminbi, also known as the yuan, has historically been pegged to the U.S. dollar, but in recent years Chinese officials have taken steps towards letting the currency fluctuate more freely [see Ultimate Guide To China Yuan ETF Investing].

The yuan is still far from a freely-floating currency; steps towards that objective have been relatively minor changes, including allowing fluctuation within a narrow band. Still, hints that the currency will gradually head higher have sent U.S.-based investors in search of ways to profit from an increase in the U.S. dollar value of the yuan. Van Eck already offers an ETN linked to the Renminbi / dollar exchange rate (CNY), with WisdomTree and Guggenheim also offering yuan ETPs in their lineup [see all China yuan ETFs].

While most analysts agree that the yuan is destined to appreciate in coming years, uncertainties remain over the timing of such a move higher. A bill currently working its way through Congress would penalize China for keeping the value of its currency depressed, and the implications of that legislation have enraged China.

“The world is transitioning from a period of U.S. dollar dominance to an era of currency blocs that better reflect the dispersion of economic growth. Certainly, the renminbi will be one of those currency blocs and China has taken significant steps to internationalize the RMB over the past two years,” said Jan van Eck, Principal at Van Eck Global. “As this trend continues, investors should consider allocating to each of these blocs over time, but neither China stocks nor China bonds are represented in widely used indices. By adding CHLC to the roster of Market Vectors China-focused products, we’re looking to make it easier for investors to add RMB-denominated exposure to their portfolios.”

Under The Hood

Key Stats
# of Securities 45
Average Modified Duration 2.75
Average Coupon 2.1%
% Chinese Issuers 65.3%
Reflects data for index as of 9/30

The Market Vectors Renminbi Bond Index includes about 45 securities in total. At the end of the third quarter, the benchmark had an average coupon of about 2.1% and an average yield to worst of about 2.5%. About 65% of the underlying bonds are rated A or higher while about 8% are rated ‘BBB’. Investors should also note that roughly a quarter of the bonds in the CHLC index are not rated.

Most of the bonds held by CHLC fall towards the shorter end of the duration spectrum; the index has an average time to maturity of less than 3 years, with only about 7% of the portfolio maturing in more than five years [see a list of short term bond ETFs here].

Corporate issuers and banks account for the biggest chunk of the fund, each representing about 38% of the underlying index. The remainder of exposure comes from national governments and supra-national issuers.

While most Dim Sum bonds are issued by corporations or entities with headquarters in mainland China, a number of western corporations have embraced the market in recent years thanks to relatively attractive financing terms. Volkswagen and Unilever serve as examples of non-Chinese companies that have debt outstanding that is denominated in the Chinese currency. According to Van Eck, about 65% of the underlying index is debt of mainland China issuers. Hong Kong issuers account for about 14%, followed by the U.S. (5%) and Germany (4%).

Dim Sum Bond ETFs

CHLC is the third product launched in the last month offering exposure to renminbi-denominated bonds, following the introduction of similar products from Guggenheim (RMB) and PowerShares (DSUM) in recent weeks. The three ETFs offer exposure to generally similar securities; each is positioned at the short end of the duration spectrum, with approximately the same number of component securities [compare China Bond ETFs].

CHLC will be the cheapest of the three options, charging an annual expense ratio of just 0.39%. DSUM charges 0.45% while RMB comes in at 65 basis points.

International Bond ETFs

CHLC becomes the third product in the Van Eck ETF lineup offering investors access to international bond markets, joining funds focusing on Latin America (BONO) and more broadly on emerging markets (EMLC).

[For more on the new China bond ETF, see the CHLC fact sheet. For updates on all new ETFs, sign up for the free ETFdb newsletter]

Disclosure: No positions at time of writing.