Source: You Like CHNA, You Must Like Volatility

It hasn’t been an easy ride for the Source CSOP FTSE A50 UCITS ETF (CHNA) which has dipped from over $500m to less than $20m AUM  

Editor, Europe
Reviewed by: Rachael Revesz
Edited by: Rachael Revesz

Chinese stocks saw their largest fall this week in eight years, as the Shanghai composite index plummeted over 8 percent amidst strong selling activity, while the Government desperately continues to try and prop up the market.

In the midst of this turbulence, ETFs tracking Chinese markets have suffered wider than normal spreads, outflows and volatility. sat down with Peter Thompson, president at ETP provider Source, to ask him about Europe's first physically-backed China A-shares ETF - the CSOP Source FTSE China A50 UCITS ETF (CHNA) - which has suffered huge outflows this year.

Source was granted a renminbi-denominated foreign investor quota in March from the China Securities Regulatory Commission to invest directly in its mainland markets, and Source is going through the second part of the application process before it is decided how much quota it will be awarded. This announcement means there is room for further A-shares products from Source. How have the developments in Chinese markets affected your A-shares ETF?

Thompson: The fund remains open. Fundamentally, recent developments in China have not affected the fund or investors’ ability to sell or buy the ETF throughout this period of volatility. Currently only two names in the FTSE China A50 Index – 2.3 percent of the market cap of the index – are closed. Whereas the CSI300 Index has around 30 names which are closed right now – 7.4 percent of the index market cap.

There have been many changes coming out China, in terms of regulatory and governmental involvement as to how that market is supported and the rules around it. We think [our ETF] it’s a great product with a great track record, and it’s doing what it says on the tin. The ETF hit a peak of around $500 million last year and is less than $20 million now, is that correct?

Thompson: We had a difficult January with a fair amount of outflows from the China A50 ETF. But regardless of inflows and outflows, we are just pleased that people invested. There has been a fair amount of profit taking. And if you want to trade China, you have to like volatility. For example, the market fell 8 percent today (Monday). iShares and db X-trackers have both halved their annual fees to 0.65 percent for their A-shares ETFs, whereas your all-in fees have not changed at 1.11 percent. Do you have plans to review this?

Thompson: Our fees are not far off from where the market is at. They are the same fees as the CSOP A50, which is listed in Hong Kong and is a hugely successful fund. We evaluate and review our fees frequently and do not necessarily react to the movements of one counterparty. There are no changes [to the fee] planned.

With respect to China there are so many variables – it’s hard to say that the market has a view on how to price China. The market is normalising around a pricing point for this benchmark.

Investors have to choose between how they diversify and structural issues [for China ETFs] but there are pretty dramatic differences as to the benchmark and exposure you can end up with.

If you look at on-exchange spreads, it shows that this cost makes up a part of the total cost of ownership. Overall we are priced at basically the same level to competitors when it comes to that total cost. Competing funds launched with much more diversified indexes. However, they now have more names in those indexes that have stopped trading – have you breathed a sigh of relief that you chose the A50?

Thompson: It is the regular market benchmark in China and in terms of volume, it will be the most liquid one. And when people are talking about an area of the world that’s quickly developing, liquidity is potentially more important to them than diversification. We’re talking about a market that can fall 10 percent in a day, therefore yes, the ability to get in and out is very important. No one worries about that liquidity to get in and out of, say, the S&P 500 or the Euro Stoxx 50. Has the CHNA fund been the most volatile of your range this year?

Thompson: Yes, this fund has been absolutely the most volatile. As an old volatility trader, this is something I’d rather buy than sell. Is there room for you to launch another A-shares China ETF?

Thompson. Absolutely, there is. We were the first ones to launch such a fund in January last year. China is in its early days. When will it go into the big indices? But what I’m saying is, when it comes to China ETFs, I want to have optionality. We have a good partner with CSOP Asset Mangement. Your top product in terms of net new assets this year is an active fund, the Pimco Euro Short Maturity ETF (PJS1), which gained €507 million and is now at over €2.2 billion. Do you have a strong focus on active ETFs?

Thompson: We have got a pretty good record with active funds with Pimco and Man GLG. We have proven and our investors have accepted to some degree that actives can work in some ETFs. And then it comes to the question: do investors want to buy it? Certain institutional customers like the simplicity and transparency of it. If it works fundamentally and operationally, we will make it work. But we don’t want to build our brand around active ETFs in Europe. Having said that, it’s good to be number one [in terms of AUM] in any space. What new products are you thinking of launching?

Thompson: Out of our 80 or so ETFs, we are light on fixed income. That’s clearly an area we want to grow. We like what we do with PIMCO. Almost three quarters of our flows this year have been into that space. We announced in early June that we are collaborating with new partners, Research Affiliates and FTSE, on the design of a new set of equity income indices. The dividend/income space is currently very compelling to investors and we believe there is room and need for better products in this space. As for commodities, we see headlines saying the bull cycle is over. But I’ve been nothing but optimistic over the last two or three years about new products.


Rachael Revesz joined in August 2013 as staff writer. Previously an investment reporter at Citywire, she has a background in writing content for retail financial advisors and has covered a wide range of subjects in finance. Revesz studied journalism at PMA Media, which has since merged with the Press Association. She also holds a B.A. in modern languages from Durham University, as well as CF1 and CF2 financial planning certificates from the CII.