DB’s Innovative China A-Share ETF

November 07, 2013

German bank breaks new ground in providing ETF access to China’s markets.

This week, Deutsche Bank brought us something new and exciting—the first U.S.-listed, nonderivative-based ETF targeting Chinese A-shares.

The way I see it, the new db X-trackers Harvest CSI 300 China A-Shares Fund (ASHR) not only changes the China investment landscape for U.S.-based investors, but might even be a game changer for the issuer—Deutsche Bank—in the U.S. ETF market.

Only weeks ago, I listed this fund as one of my top picks for filings with blockbuster potential, and frankly, I’m surprised at the speed with which they were able to bring this fund to market.

That said, it’s time to dissect ASHR regarding its exposure and unique structure.

The Investment Case For ASHR

ASHR tracks the popular CSI 300 Index, which holds the 300 largest and most liquid China A-shares. In mainland China, the CSI 300 Index is synonymous with the S&P 500 Index here in the States.

For those new to the complexities around Chinese share classes, A-shares are renminbi-denominated shares traded on the Shanghai and Shenzhen exchanges (see our Complete Guide to Chinese Share Classes).

Some would argue that the China A-shares market is the last major niche market that is still relatively untapped by global investors.

That’s because the A-share market has been, and still is, mostly off limits to foreign investors, except those institutional investors who have been granted a special status called qualified foreign institutional investors (QFII).

While db X-trackers doesn’t officially have QFII status, the fund is able to hold physical A-shares through its subadvisor, Harvest Global Investments, which has obtained a renminbi QFII (RQFII) status.

RQFII status is another program implemented by the Chinese government wherein it allows certain institutions outside of mainland China to raise renminbi, and allows them to purchase securities in the mainland, up to a certain quota limit.

The fund’s relationship with its subadvisor, Harvest, is what makes ASHR truly groundbreaking in its ability to hold physical A-shares. Till the launch of ASHR, investors had limited options for accessing A-shares.

The A-share-focused Market Vectors China ETF (PEK | F-32) has been around for years, but that fund gets its exposure to the CSI 300 Index—the same index ASHR uses—through a swap agreement with Credit Suisse, a QFII.

The swaps mean PEK carries with it counterparty risk, and it’s historically been plagued by premiums to its net asset value (NAV) when demand for A-shares heats up. Since QFIIs charge a higher premium for their swaps when demand increases, those premiums manifest themselves in the fund trading at substantial premiums.

There’s also the new PowerShares China A-Share Portfolio (CHNA), a derivatives-based A-share ETF that launched only a month ago. This actively managed fund currently gains its exposure to A-shares through a futures contract traded in Singapore that’s tied to the FTSE China A50 Index.

Then there’s the Morgan Stanley China A Share Fund (CAF), which is a closed-end fund, not an ETF.

While CAF physically holds A-shares, being a closed-end fund, it cannot create or redeem shares. Thus, CAF trades purely based on market forces instead of the underlying shares—meaning frequent premiums and discounts.

 

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