Daily ETF Watch: New China Bond Fund Coming

KraneShares, an ETF issuer that focuses mainly on China’s capital markets, has filed for an ETF that will invest in renminbi-denominated bonds that are underwritten by China Development Bank (CDB). The KraneShares CDB ChinaBond ETF will track an index of bonds from mainland China corporate, government and quasi-sovereign issuers, the index said.

CDB is a large state-owned bank that backs many of China’s infrastructure, urbanization and other development projects, in addition to global business ventures and cross-border investment, according to the prospectus. Debt underwritten by the bank is generally considered to be of high quality.

The corporate debt included in the index must have the equivalent of AAA rating from a recognized China-based credit rating agency, the prospectus noted, while government and quasi-sovereign debt has no rating requirements. There are also no maturity requirements for eligible components, but the China Central Depository & Clearing Co., Ltd.—the index provider—expects that quasi-sovereign issues included in the index will have remaining maturities of five to 10 years while the other securities in the index will have at least one year of remaining maturity.

The index is cap-weighted and rebalanced on a monthly basis. At rebalancing, individual component weights are capped at 25% of the index. In early 2016, the benchmark had 262 components. The prospectus said that it expected that, in general, government debt would represent roughly half of the index, while the corporate and quasi-sovereign debt categories would each represent about 25% of the index.

The prospectus indicated that the fund’s subadvisor would have a renminbi-qualified foreign institutional investor quota and that it may apply for a qualified foreign institutional investor quota as well.

There are currently four China bond funds trading on U.S. exchanges. The largest is the PowerShares Chinese Yuan Dim Sum Bond ETF (DSUM | C), with roughly $65 million in assets under management. However, while DSUM’s holdings are denominated in renminbi, they are issued in Hong Kong, not the China mainland.

The Market Vectors ChinaAMC China Bond ETF (CBON | F) is closer to the fund outlined in the recent filing in that it tracks credit, government and quasi-sovereign renminbi-denominated debt issued in mainland China, but it launched in 2014 and has gathered less than $15 million in assets.

The KraneShares filing tentatively indicated that the ETF would launch on the NYSE Arca exchange, but it did not include an expense ratio or ticker.

Contact Heather Bell at [email protected].