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China Bond ETFs to Generate Yield and Diversify Rate Risk


The U.S. bond market is getting battered as traders exit in anticipation of higher rates. However, fixed-income exchange traded fund investors are not limited to U.S. investments and can diversify rate risk with foreign exposure.

For example, the PowerShares Chinese Yuan Dim Sum Bond Portfolio (DSUM) , which has $133.1 million in assets under management, tracks Chinese Renminbi (RMB)-denominated bonds issued by governments, agencies, supranationals and credit securities, excluding synthetics, retails and CDs. DSUM has an effective duration of 2.6 years and a 30-day SEC yield of 3.24%.

Additionally, the Market Vectors Renminbi Bond ETF (CHLC) , which has $5.3 million in assets, provides another option for following Chinese Renminbi-denominated investment grade bonds or bonds from parent companies with investment grade ratings. CHLC has an effective duration of 1.64 years and a 2.52% 30-day SEC yield.

While China may be an emerging market, the two Chinese bond ETFs provide exposure to relatively safe investment-grade bonds. DSUM has a 49% weight to investment grade bonds rated BBB and above, whereas CHLC has 57.1% in investment grade bonds.

The Chinese bond ETFs have also been outperforming U.S. government bonds as Fed tapering speculation ramped up rates in the U.S. DSUM is up 6.1% year-to-date while CHLC is up 4.5% this year.

In comparison, the iShares 1-3 Year Treasury Bond ETF (SHY) , which has a similar relatively similar duration of 1.83 years, only returned 0.3% year-to-date. Additionally, SHY comes with a smaller 0.16% 30-day SEC yield.

Potential investors, though, should be aware that since Chinese bond ETFs are denominated in the local yuan currency. Consequently, investors will be exposed to currency risk – if the yuan depreciates against the U.S. dollar, the bonds could generate lower returns once converted into U.S. dollars.

In China, new yuan loans in November were a higher-than-expected 624.6 billion yuan, or $103 billion, compared to a 580 billion yuan median estimate, which suggests authorities are trying to stimulate growth, reports Bloomberg. The PBOC, though, has said that the economy “may see a decline in leverage” over a long period.

“The current pace of extension of credit is still rather strong,” Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc, said in the article. The latest data “will lead people to wonder how adamant are the authorities to rein in credit growth, how serious are they to contain the increase in leverage.”

PowerShares Chinese Yuan Dim Sum Bond Portfolio

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