New Ways to Trade China’s Bond Market

09/27/2011 9:00 am EST

Focus: ETFS

Michael Johnston

Co-Founder and Senior Analyst, ETF Database

These new ETFs allow traders and investors effective, low-cost exposure to Chinese bonds and are designed to reward buyers with moderate yields and growth via continued yuan appreciation.

A day after Guggenheim rolled out ever the first US-listed ETF offering exposure to Chinese bonds, PowerShares followed with a similar product of its own. The recently launched PowerShares Chinese Yuan Dim Sum Bond Portfolio (DSUM) will replicate an index comprised of corporate and government debt obligations denominated in the Chinese currency.

The fund, linked to the Citigroup Dim Sum (Offshore CNY) Bond Index, will invest in the “Dim Sum” bond market, which consists of debt securities listed in Hong Kong. The fund recently had an effective duration of about 3.1 years and a weighted average coupon of about 3.1%. DSUM will charge an expense ratio of 0.45%, which is at the low end of the range within the emerging markets bond ETFs category. 

Tapping Into China’s Bond Market

As interest in achieving access to China has surged in recent years, investors have gradually beefed up equity exposure to the world’s second-largest economy—in many cases embracing ETFs as the most efficient way to do so. But exposure to Chinese bonds has historically been minimal within the portfolios of most US-based investors, the result of both logistical challenges to tapping into this asset class and a lack of emphasis on the potential benefits of geographic diversification within the bond section of a portfolio.

Recent years have seen the debut of products such as the WisdomTree Emerging Markets Local Debt Fund (ELD) and more targeted WisdomTree Asia Local Debt Fund (ALD), both of which have become tremendously popular tools for accessing international fixed-income markets.

Now, the last week has brought the launch of two China-focused bond ETFs; Guggenheim won the race to the finish line on Thursday with its Guggenheim Yuan Bond ETF (RMB).

Both RMB and DSUM will allow investors access to a portfolio consisting of debt securities denominated in the Chinese currency, but traded outside of mainland China in Hong Kong. The so-called “Dim Sum” bond market allows investors to achieve exposure to the Chinese currency, which could be beneficial if the yuan continues to strengthen relative to the dollar in coming years.

At the same time, the bond funds will allow investors to achieve a moderate yield that roughly corresponds to the current returns that could be expected from dollar-denominated debt of comparable quality.

It should be noted that the Dim Sum approach to Chinese bond exposure doesn’t necessarily deliver a pure-play basket of Chinese companies. The portfolios are certainly tilted towards Chinese government agencies and corporations, but these ETFs also include some debt from Western corporations as well.

DSUM includes bonds denominated in yuan that are issued by Volkswagen (VLKAY), while RMB includes debt of British/Dutch consumer products giant Unilever (UL).

By Michael Johnston of

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