Dim Sum Bond ETFs to Diversify a Fixed-Income Portfolio

ETF Trends

Many bond investors focus on U.S. government and corporate debt to fill their income needs. With the Fed tightening its monetary policy, investors should begin looking to exchange traded funds that have foreign exposure to fill some of their fixed-income needs.

For instance, the PowerShares Chinese Yuan Dim Sum Bond Portfolio (DSUM) offers a 3.35% 30-day SEC yield and Market Vectors Renminbi Bond ETF (CHLC) has a 2.58% 30-day SEC yield. [Asia Bond ETFs Sport Decent Yields]

Dim sum bonds, named after the bit-sized Chinese dish popular in Cantonese restaurants, are Chinese yuan-denominated debt issued by international corporations or entities.

According to PowerShares, dim sum bonds help diversify a bond portfolio by providing investors with exposure to the changing value of the offshore yuan currency and through exposure to China’s yield curve.

Specifically, China recently began to let its yuan float in a range against the U.S. dollar. Previously, the government pegged the yuan against the greenback to keep it artificially low to promote Chinese exports – a weaker currency relative to the USD means exports are cheaper in dollar terms.

In January 2014, the People’s Bank of China announced their intentions to diminish forex market intervention, let the yuan float in a larger trading band and increase the currency’s flexibility. The PBoC, though, has guided the yuan to a weaker position against the USD as the government tries to reign in speculative foreign funds, reports Shen Hong for the Wall Street Journal. The yuan is down 1.7% since its January high.

Additionally, yuan-denominated securities help limit U.S. investors’ exposure to interest rate risk at home. The dim sum bonds move in response to shifts in China’s rates.

The dim sum bond ETFs provide exposure to international issuers. For instance, DSUM has a 44.0% weight in China, 12.4% in British Virgin Islands, 10.1% in Caymen Islands, 6.8% in Hong Kong, 4.6% in Singapore, 4.0% in France, 3.9% in Luxemberg, 3.9% in U.K. 1.7% in the U.S. and 1.6% in the UAE. CHLC includes country exposure to China 50.8%, Germany 18.8%, Malaysia 3.2%, U.K. 3.2%, U.s. 3.2% and Singapore 3.1%.

PowerShares also points out that dim sum bonds have one of the best yield-to-risk profiles as they offer a high yield per unit of duration relative to other segments of the bond market. Specifically, DSUM has an effective duration of 2.43 years and CHLC has an effective duration of 1.84 years.

Additionally, the dim sum funds include high quality bonds, with investment grade debt accounting for about half of the overall portfolio in both ETFs.

The PowerShares bond ETF comes with a 0.45% expense ratio, whereas the Market Vectors fund has a 0.39% expense ratio.

For more information on the bond market, visit our bond ETFs category.

 

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