Van Eck Launches First China Onshore Bond ETF (CBON)
While New York-based issuer Van Eck was the first to launch a China A-shares equity fund for US investors, it has yet again become the first to launch an ETF targeting a certain market, providing investors with direct access to China’s roughly $5 trillion onshore bond market.
The newly launched fund The Market Vectors ChinaAMC China Bond ETF trades under the ticker – CBON, and looks to invest in a broad basket of Chinese bonds, denominated in the local currency and issued in mainland China (read: China A-Shares ETFs Soar on Cross-Border Trading Link).
CBON in Focus
CBON tracks the ChinaBond China High Quality Bond Index to provide exposure to fixed-rate, Renminbi (:RMB)-denominated bonds issued in the People’s Republic of China by Chinese credit, governmental and quasi-governmental issuers. Chinese credit issuers are generally considered to be issuers of central enterprise bonds, local enterprise bonds, medium-term notes, corporate bonds and railway debt.
RMB bonds are traded on the inter-bank bond market or the exchange-traded bond market in China. Credit RMB bonds must have at least one AAA rating by one of the Chinese local rating agencies (read: China Bond ETFs in Focus on Recent Market Turmoil).
The fund presently holds 16 bonds with China Government Bond, China Development Bank Corp and Anhui Conch Cement Co Ltd being the top three holdings with a combined exposure of roughly 16%. The bonds have a weighted maturity of 2.9 years and yield to maturity of 3.96%.
As far as sector concentration is concerned, the fund allocates its assets nicely among different sectors. Energy forms the top spot with 16.4% allocation, followed by Industrial 8.8% and Consumer Cyclical 8.6%. The fund charges 57 basis points as fees for this exposure.
How could it fit in a portfolio?
The fund is a good option for investors seeking exposure to Chinese onshore bonds – the largest emerging market bond segment. These bonds are a good bet to maximize current income given their relatively high yield.
Also, the fund is expected to provide diversification benefits as Chinese onshore bonds have low correlation to U.S. Treasuries and other global fixed-income and equities markets.
However, investors should keep in mind that the onshore Chinese bond market carries currency, default and regulatory risks (see all the Emerging Market Bond ETFs here):
ETF Competition
Being the first ETF to provide exposure to the Chinese onshore bond market, CBON will definitely get the first mover advantage.
However, we have two ETFs which provide exposure to the Hong Kong bond market – Chinese Yuan Dim Sum Bond Portfolio (DSUM) and Market Vectors Renminbi Bond ETF (CHLC). DSUM tracks the Citi Custom Dim Sum (Offshore CNY) Bond Index to provide exposure to Chinese Renminbi (:RMB)-denominated bonds. It manages an asset base of $164.1 million and has a 30 day SEC yield of 3.76%, while charging 45 basis points as fees.
CHLC, however, manages a small asset base of $5.2 million and looks to provide exposure to Chinese Renminbi-denominated bonds that are investable to market participants outside Mainland China. The fund charges 39 basis points as fees and has a 30-Day SEC Yield of 2.95% (read: The Guide To China Bond ETFs).
Thus, the newly launched fund has a great chance of building a sizeable asset base for itself given that it manages to generate decent total returns net of fees, and assuming investors are looking for exposure to this specific corner of the emerging market bond world.
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