New Van Eck ETF opens a promising new investment frontier in mainland China.
Van Eck, the New York-based money management firm known for its commodities funds, is adding to its roster of emerging markets exchange-traded funds with the launch today of an ETF that taps into China A-shares, pioneering a strategy that has been largely off limits to U.S. investors until now.
The Market Vectors China ETF (NYSEArca: PEK) will give investors front-row access to the performance of the China A-share market through the use of swaps and derivative instruments while tracking the CSI 300 index, which is comprised solely of China A-shares securities.
China A-shares are securities from mainland China-based companies, and have been mostly off limits to foreign investment and tightly regulated by the government. But ongoing financial reforms that aim to improve foreign investment in mainland companies are slowly making A-shares more accessible.
Demand for Chinese equities isn’t new, especially now that investors are increasingly seeking diversification into emerging markets looking for stronger growth than in developed nations, which are, for now, mired in sluggish growth and relatively high unemployment.
The Chinese equities market represents roughly a third of the market cap of all emerging market equities, and China’s A-shares represent 72 percent of all China equities and 24 percent of all emerging markets equities, according to data provided by Van Eck.
PEK, by mirroring the performance of the A-shares market, hopes to broaden investor access to various sectors of the Chinese economy as well as achieve a wider representation of domestic themes.
Until now, foreign investment in China was largely restricted to B-shares—a dollar-denominated version of mainland securities—as well as to H-shares, which trade in Hong Kong and other exchanges. But those limitations, Van Eck argues, have led to underweighting of China in emerging markets and in BRIC strategies.
The fund, which in its initial stages will be comprised of swaps and derivatives, will eventually hold actual A-Share securities after Van Eck receives a Qualified Foreign Institutional Investor (QFII) status, Van Eck’s managing director of ETFs Adam Phillips said in a conference call Friday.
The QFII system is a tightly regulated structure put in place by the Chinese government to control foreign investment in mainland companies. Van Eck’s approval is pending, but the company has no timeframe for when that might happen.
While switching from swaps into the actual securities will improve the company’s financing costs for the fund, the switch should not impact PEK’s performance or investors, Phillips said. PEK comes with an expense ratio of 0.72 percent.
Van Eck first filed paperwork with the Securities and Exchange Commission for PEK in March 2009.