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Another China A-Share ETF from Deutsche Bank

Zacks Equity Research

Despite fears of slowdown in the world’s second largest economy, the Chinese ETF world continues to see new product launches targeting the nation. Earlier this year, we saw two product launches with a focus on China – Bosera MSCI China A ETF (KBA) and Harvest MSCI All China Equity Fund (CN).

This time around, Deutsche Bank has once again partnered with Harvest Global Investments Limited, China’s second largest asset manager, and launched a new product targeting the China-A shares market (read: China A-Shares ETF from KraneShares Hits the Market).

The latest product – db X-trackers Harvest CSI 500 China-A Shares Small Cap Fund (:ASHS) – is the second fund launched by Deutsche Asset & Wealth Management in a month. Also, this is the second fund by the bank targeting the China-A share market.

Towards the end of last year, the bank had launched Harvest CSI 300 China A-Shares Fund (ASHR).

A-Shares ETF - ASHS in Focus

A-shares are stocks of firms based in mainland China and are listed in either Shanghai or Shenzhen and only Qualified Foreign Institutional Investors (:QFII) and Renminbi Qualified Foreign Institutional Investors have access to these shares. Deutsche’s partnership with Harvest (a QFII) will give U.S. investors access to this tightly controlled market.

ASHS seeks to passively track the CSI 500 Index, giving investors exposure to 500 small cap A-Shares companies (read: China A-Shares ETFs Explained).

In terms of portfolio, Industrials dominates the space having roughly one-fourth allocation in the fund, though Consumer Discretionary, Materials, Information Technology and Health Care also have double-digit exposure in the fund. On the other hand, Utilities and Energy have less than 3% allocation in the fund.

The fund also does a good job by spreading out its assets well among individual stocks. None of the stocks occupy more than 0.8% of total assets. The fund charges 80 basis points as fees.

How could it fit in a portfolio?

This ETF can be an intriguing choice for investors seeking a diversified play on the Chinese equity markets.

However, thanks to slowdown concerns, property market bubble and debt issues, the Chinese markets have been seeing a difficult 2014 (read: Inside the Recent China A Shares ETF Slump).

Nonetheless, the government is using every means possible to bring China back to track. It has announced a series of mini-stimulus measures to influence the real economy. These reform measures are expected to be quite beneficial to its economy in the long run.

Moreover, China has been catching up with the U.S. economy over several years now and is expected to soon overtake the U.S. as the No. 1 economy.
Choy PengWah, Chief Executive of Harvest Global Investments Limited, said, "This new product provides investors with another option to get exposure to China's dynamic and fast-growing economy."

ETF Competition

The biggest fund iShares FTSE China 25 Index Fund (FXI) dominates the China equities space with an asset base of $4.7 billion (read: Invest Like Jim Rogers with These ETFs).

However, there are some A-shares products in the market as well. Apart from Deutsche Bank’s ASHR, Market Vectors China ETF (PEK), PowerShares China A-Share Portfolio (CHNA), and the recently launched KBA are some of the other products from this space.

KBA is the costliest among them charging 110 basis points with CHNA being the cheapest with 50 basis points as annual fees.

Though PEK is the oldest product in the China-A shares space, ASHR has overtaken it in terms of asset size. ASHR now manages an asset base of $147.8 million, roughly five times the asset base managed by PEK.

Also, ASHR and the issuer’s latest product ASHS are completely complementary to each other with ASHR focusing on the large cap segment and ASHS targeting the small companies listed in the Chinese A share market. Thus, in no way they are expected to eat into each other’s business.

In fact, if we consider ASHS’ initial investment it has easily out spaced CHNA and KBA going by the asset base. While the initial investment for ASHS stands at $7.5 million, CHNA and KBA manage smaller asset sizes of $2.2 million and $5.7 million respectively.

Thus, ASHS might be able to gather more assets in the coming days, if we go by the popularity attained by ASHR within less than a year of its launch.