ETSpreads Plans China Bond Fund

May 12, 2011


Exchange Traded Spreads Trust, or ETSpreads, a San Francisco-based fund company that has a number of ETFs in the works related to credit default swaps, filed with the Securities and Exchange Commission to market a China bond fund, the company’s first move since it acquired exemptive relief needed to market fixed-income ETFs.

ETSpreads started its process to enter the ETF world in 2008 with a filing requesting exemptive relief that outlined four bond-related funds. The company says the application is still pending. Exemptive relief grants ETF companies exceptions to the Investment Company Act of 1940, and obtaining it is the first step toward launching products.

Since that first filing in 2008, ETSpreads filed paperwork for additional fixed-income funds, including a TIPS fund, and got that exemptive relief from U.S. regulators to market some of these strategies in December.

The registration statement filing dated May 11 details the ETS Offshore RMB Bond Fund, which is designed to track the RMB Index, an “unmanaged index” comprising renminbi-denominated corporate and government bond issues outside China’s mainland. While the portfolio currently comprises Hong Kong-issued bonds, it “may include RMB denominated bonds issued in other countries or regions in the future,” the filing said.

The ETF’s benchmark, which is capitalization-weighted based on the bonds’ current amount outstanding, also includes both fixed- and floating-rate bonds, but excludes convertibles and exchangeable issues. The strategy might also include a roster of derivatives instruments, the filing said.

“The total return sought by the Fund consists of income earned on the fund’s investments, plus capital appreciation, if any, which generally arises from decreases in interest rates,” the filing said.

The fund will track its benchmark through a representative sampling strategy. No ticker or fees were disclosed.

Future Plans Still On Hold

The company’s original exemptive relief filing is still coursing through the Securities and Exchange Commission, possibly because of the SEC’s yearlong review of planned funds that contemplate the use of derivatives to achieve their investment strategies. The company declined to comment, citing regulatory reasons.

Under that yet-to-be-approved exemptive relief request, the company said the initial funds it is contemplating bringing to market include the ETSpreads High Yield CDS Tighten Fund, the ETSpreads High Yield CDS Widen Fund, the ETSpreads Investment Grade CDS Tighten Fund and the ETSpreads Investment Grade CDS Widen Fund.



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