China A-Share ETFs Tsunami Coming

February 05, 2014

RQFII genie's out of the bottle; be prepared for a China A-share ETF frenzy in 2014.

Renminbi qualified foreign institutional investor (RQFII) ETFs are a new breed of funds in the U.S., capable of directly holding mainland China-listed “A-shares,” as opposed to using derivatives to capture the fairly restricted market.

The RQFII program allows Hong Kong-based companies to raise capital (renminbi) outside of China, and directly buy shares listed in Shanghai and Shenzhen.

Now there’s a tectonic shift occurring, with ETF issuers in the U.S. teaming up left and right with Hong Kong-based companies with “RQFII status” as their subadvisors to launch physically backed, A-share ETFs in the U.S.

Let’s start with Deutsche Bank, which tapped Harvest Global Investments as its subadvisor to successfully launch the first RQFII ETF in the U.S. last November, the db X-trackers Harvest CSI 300 China A-shares Fund (ASHR). Most impressive, ASHR was seeded with more than $100 million and it already boasts assets under management of $207 million.

Soon after, Van Eck turned its formerly swap-based China A-Share ETF into a physically backed fund by teaming up with China Asset Management (AMC) as its subadvisor. Van Eck also renamed its ETF the Market Vectors ChinaAMC A-share ETF (PEK | F-49). PEK, which was granted an initial quota of 1 billion RMB ($165 million), tracks the same index as ASHR, the CSI 300 Index.

But that’s just the beginning.

We also have newcomer KraneShares, which teamed up with Bosera Asset Management, with a planned RQFII ETF slated to track the MSCI China A-shares Index. Like PEK, KraneShares’ fund, the Bosera MSCI China A Share ETF (KBA), was awarded an initial RQFII quota of 1 billion RMB ($165 million).

Source, a leading ETF provider in Europe, who barely beat out db X-trackers to launch the first RQFII ETF in Europe, is also expected to launch an RQFII ETF in the U.S. Source is teamed up with CSOP Asset Management, and its CSOP Source FTSE China A50 ETF will track the large-cap-focused FTSE China A50 Index.

So what does all this mean for U.S. investors?

It means now that these issuers have established relationships with their respective subadvisors in Hong Kong, you can expect a flood of ETF launches in the coming years.

The filing front has literally been bombarded by new RQFII ETF filings in just the past few months. Even though I work in the industry, it’s making my head spin just trying to keep up with them!

Besides the two products already launched, we now have more than 15 RQFII ETF filings, which include seven sector funds and two small-cap funds (listed in table below). Db X-trackers and Van Eck have been the most aggressive in their filings for RQFII ETFs.

There’s a lot to digest here, so I’ll give you my quick 2 cents on what I think about all this.

I think sector and small-cap funds are always useful as tactical plays or complements to your portfolio, so their existence is welcome.

For example, db X-trackers’ small-cap ETF will be based on the CSI 500 Index, which will provide an entirely different exposure (away from financials, which dominate the FTSE A50 and CSI 300 Indexes) to mainland Chinese small-cap firms that aren’t included in any ETFs at the moment.

Certain sector funds also look promising. Db X-trackers’ suite of sector funds will consist of companies from the broader CSI 800 Index, which includes the CSI 300 and CSI 500 Indexes. I’m especially eyeing the consumer-focused ETFs, as well as the health care ETF.


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