The ETF world has seen a good number of product launches targeting China by different issuers over the past one year. These include KraneShares Bosera MSCI China A Share ETF (KBA), db X-trackers Harvest CSI 300 China A-Shares Fund (ASHR), CSI Five Year Plan ETF (KFYP) and CSI China Internet ETF (KWEB).
In a move to expand the country’s offerings, Deutsche Bank introduced db X-trackers Harvest MSCI All China Equity Fund (CN - ETF report) on the last trading day of April. This has boosted the issuer line-up to a total of 20 ETFs (read: China A-Shares ETF from KraneShares Hits the Market).
New China ETF in Focus
This ETF looks to track the performance of the MSCI All China Index, which includes A-shares, H-shares, B-shares, Red chips, and P chips along with China securities (including ADRs) that are listed on NYSE Euronext (New York), NASDAQ, New York AMEX and the Singapore stock exchanges.
The fund would provide a wide exposure to both large and mid cap firms that are listed in China, Hong Kong, the U.S. and Singapore. It also attempts to gain exposure to the China A share components by investing in its own ASHR. The ETF holds 145 securities in its basket with ASHR making up for half of the portfolio (read: Inside the Recent China A Shares ETF Slump).
Other securities such as Tencent Holdings, China Mobile and China Construction Bank and Ind & Comm Bk of China round off the top five with a combined 14.19% share. This suggests lower concentration risk among a number of securities and prevents heavy concentration.
From a sector look, the product is weighted heavily toward financials with 38.5% of total assets while telecom services and energy make up for double-digit exposure in the basket. In terms of geographical allocation, North American firms account for 50.2% share, followed by China (48.2%) and Hong Kong (1.6%).
How does it fit in a portfolio?
This ETF could be an intriguing choice for investors seeking a diversified play on the Chinese equity market with all types of shares trading in one basket. Though the recent indicators point to a sluggish growth in the world’s second largest economy, the weakness could be viewed as a buying opportunity (read: China ETFs Slump on Terrible Export Numbers).
This is especially true as IMF raised the Chinese economic growth outlook by 0.3% to 7.5% for this year, suggesting that new reforms would certainly drive the economy higher in the long term despite the growing debt concerns. Further, China is expected to overtake the U.S. as the No. 1 economy by the year end, as per the latest data from the world's leading statistical agencies.
Given this, the new product could see a nice boost in the coming months as it provides huge diversification benefits across a single security and some cushion across sectors.
Competition for the new China ETF looks to be quite fierce as there are currently close to three dozens of China ETFs in the market. In particular, the product would face stiff competition from the three most popular ETFs – iShares FTSE China 25 Index Fund ((FXI - ETF report)), iShares MSCI China Index Fund ((MCHI - ETF report)) and SPDR S&P China ETF ((GXC - ETF report)).
FXI is a large cap centric fund with over $4.7 billion in AUM and provides exposure to a small basket of 26 Chinese stocks with heavy concentration on its top 10 holdings. MCHI holds 142 securities in its basket with moderate concentration in its top 10 firms. The ETF has amassed nearly $965.5 million in its asset base and is focused on large and mid-sized companies in China.
The third fund, GXC, offers exposure to the large basket of 267 stocks with a slight tilt toward large caps. The fund has moderate concentration in the top 10 firms and has managed $773.5 million in its asset base so far (see: all the Emerging Asia Pacific ETFs here).
The new All China Equity Fund is a bit pricey, charging 71 basis points a year compared to 62 bps for MCHI and 59 bps for GXC. However, it is inexpensive given the expense ratio of 0.73% for the ultra-popular FXI.
Given this, the new Deutsche Bank fund may find it difficult to garner investor’s interest and with the slowdown in the Chinese economy and the current slump in the stocks, investors might stay away from this market for the time being.
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