After a long pause, Deutsche Bank appears to be going full throttle into the ETF world. The company has put out half a dozen funds in just the second half of this year, marking the first time since 2011 that the firm has expanded its lineup.
The focus of this latest surge has largely been on niche products in the yield space, as well as a few international investments too. And continuing with this international trend, Deutsche Bank, under its db X-trackers brand name, has put out its latest addition, this time targeting the Chinese market with the Harvest CSI 300 China A-Shares Fund (ASHR).
As you might be able to guess from its name, the fund will not focus on the traditional side of the Chinese market—shares that either trade in Hong Kong or in the U.S. as ADRs—and will instead offer up exposure to China A-Shares. This class of shares has long been restricted to domestic Chinese investors, and is quoted in Chinese currency (renminbi) as well (also see Focus on These China ETFs for Outperformance).
While this might sound similar to some of the other A-Shares focused funds on the market, ASHR is actually employing a first-of-its-kind exposure in the space. The new fund will be—at time of writing—the only ETF to offer direct exposure to the A Shares market, without worrying about swaps or any other derivative instruments to gain access.
How is this possible?
Generally speaking, the A-Shares market is tightly controlled and limited to domestic investors. Foreigners can obtain access by becoming a ‘Qualified Foreign Institutional Investor’ or QFII for short, although this is a pretty small list too.
Due to this, many foreign investors had to either utilize A-Shares swaps or other derivatives in order to obtain access to the space. Deutsche Bank looks to have found a work around though, mainly by partnering with Harvest Global Investments Limited.
This asset manager was one of a handful of Chinese companies in Hong Kong to obtain renminbi QFII status in China, giving it direct access to the A-Shares market. And by partnering with Deutsche Bank, U.S. investors now have access to the market in exchange-traded form as well (read China ETF Investing 101).
A-Shares ETF in Focus
The ETF will track the CSI 300 Index, giving investors exposure to 300 A-Shares companies. The product will be a bit pricey though, as its expense ratio comes in at 108 basis points a year, though a solid index dividend yield of 2.4% should help to offset this.
In terms of the portfolio, financials dominate, accounting for nearly 40% of the index, though industrials (13.1%), and consumer discretionary (11.3%), also receive double digit percentage allocations. On the other side, telecoms, utilities, and technology all receive less than 5% of assets each. There also isn’t much of a worry from an individual stock look either, as no single company makes up more than 4.3% of the index.
It is also worth noting that bid ask spreads are usually a concern with these types of new funds, as the level of assets invested is usually pretty low. This isn’t really the case for ASHR though, as the initial investment stands at $107 million, making it the largest initial capital investment for an ETF since 2007 (also see 3 Overlooked Emerging Market ETFs).
“The initial investment in ASHR demonstrates the ground breaking nature of this ETF and is a positive indicator of pent up demand for direct exposure to mainland Chinese equities,” said Martin Kremenstein, head of Passive Asset Management for Deutsche Asset & Wealth Management Americas in a press release.
The biggest fund in the China ETF world continues to be the iShares China Large Cap ETF (FXI), which dominates the landscape. However, there are also two other A-Shares products on the market; the relatively old Market Vectors China A Shares ETF (PEK), and the newly-minted PowerShares China A-Shares Portfolio (CHNA).
These have attracted a little bit of assets, and are relatively cheap for investors (50 basis points for CHNA and 72 basis points for PEK), especially when compared to the new ASHR. Still, both CHNA and PEK go about obtaining their China exposure in very different ways (also read PowerShares Launches New China A-Shares ETF).
PEK focuses on swaps in order to give it exposure to the CSI 300 Index, though a recent press release from Market Vectors suggests that they are in talks to get direct access too. Meanwhile, CHNA invests in the A-Shares by looking at FTSE China A50 Index futures which trade in Singapore.
So although the three funds in this space have very similar names and focuses, there are some stark differences between their costs, and how they obtain their exposure. Given this, and the huge level of initial interest in ASHR, there is plenty of reason to believe that the fund can push investors past its somewhat high expense ratio, and be a success in the increasingly crowded China ETF market.
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