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New China Currency-Hedged ETFs Head-to-Head

Zacks Equity Research

Currency moves in China was the most-talked about issue in the month of August when the country devalued its currency by 2% against the greenback. As per barrons.com, the Chinese government viewed yuan as an extremely strong currency and thus took this epic step. Notably, the Chinese authorities follow a trading band around the official reference rate it sets each day for the value of the yuan against the dollar (read: Guide to China Yuan ETF Investing).

Several market participants believe that China’s struggling export profile was behind this move. Soft economic conditions in both Europe and Japan weighed on China’s exports. This scenario might have prompted Chinese policymakers to go for currency devaluation.

Not only this, exports declined 6.9%, much worse than economists’ expectation of 3% in October. With further policy stimulus expected from the Euro zone and Japan and their depreciating currencies, only a weakening Chinese currency might save its exports going forward.

Notably, the U.S. dollar has gained about 3.3% against the Chinese Yuan Renminbi so far this year (as of November 6, 2015). Given the looming Fed policy normalization and its depreciating impact on a basket of currencies, yuan might lost more strength in the days to come.

All these necessitates the launch of currency-hedged Chinese equities ETFs which were absent in the marketplace till October 2015. But sensing the need of the hour, CSOP Asset Management and Deutsch Bank recently launched two China A-Shares currency-hedged ETFs,

CSOP MSCI China A International Hedged ETF (CNHX) and Deutsche X-trackers CSI300 CHN A Hedged Equity ETF (ASHX).

Though CNHX and ASHX have similar approaches, there are certain key differences between the products. Below, we have highlighted the products in greater details (read: Top ETF Stories to Watch for in November).
 
CNHX in Focus

The CSOP MSCI China A International Hedged Exchange Traded Fund looks to track the performance of the MSCI China A International with CNH 100% Hedged to USD Index. The index delivers the performance by hedging the currency exposure of the MSCI China A International Index, to the USD. The index is 100% hedged to the USD by selling Renminbi currency forwards at the one-month forward rate (read: Correction Seems Over: Time for China ETFs?).

Making its debut in mid October, the fund has amassed about $3 million in assets. It charges 79 bps in fees. The index is heavy on financials which makes up about one-third of the portfolio followed by Industrials (18.4%). The 344 holding-product is extremely diversified in nature with no stock accounting for more than 0.6% of the basket.

ASHX in Focus

The Deutsche X-trackers CSI 300 China A-Shares Hedged Equity ETF looks to track the CSI 300 USD Hedged Index. The fund has amassed about $2.6 million in assets and its expense ratio is 1.65%. This index also has a tilt toward the financial sector with about 40% exposure. Industrials (18%) and Consumer Discretionary (10.4%) take the next two spots.

In short, the fund is the currency-hedged version of the fund Deutsche X-trackers Harvest CSI300 CHN A (ASHR). Notably, the 302-stock ASHR is also a diversified fund, though not as wide as CNHX. The top holding of ASHR takes 4.05% of the fund.

Bottom Line

Though CNHX and ASHX track different indexes and hold separate sets of stocks in their top 10, they follow a similar investment objective and enjoy the first-mover advantage in the currency-hedged Chinese equities ETFs space. Hence, investors are expected to benefit from putting their capital in any of the above two funds. However, they should keep in mind that ASHR is more expensive than CNHX, and its long-term success will depend on the returns it manages to generate, net of fees.

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DEUTS-XT C300 A (ASHX): ETF Research Reports
 
DEUTS-XT HV CS3 (ASHR): ETF Research Reports
 
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