Deutsche AWM launches Europe’s first China sovereign bond ETF

Jul 14th, 2015 | By | Category: Fixed Income

Deutsche Asset & Wealth Management (Deutsche AWM), one of Europe’s largest providers of exchange-traded funds, has launched Europe’s first ETF to provide investors with physical exposure to China’s domestic sovereign bond market.

Deutsche AWM launches Europe’s first China sovereign bond ETF

Deutsche AWM has launched Europe’s first China sovereign bond ETF, providing exposure to Renmini-denominated medium-term debt issued by the government of the PRC.

The db x-trackers II Harvest CSI China Sovereign Bond UCITS ETF (DR), which has been listed on the Deutsche Börse with a London Stock Exchange listing to follow, is a physical replication ETF that tracks the performance of the CSI Gilt Edged Medium Term Treasury Note Index.

The CSI Gilt Edged Medium Term Treasury Note Index is calculated by China Securities Index Co. and reflects the performance of tradeable debt issued by the government of the People’s Republic of China and traded on the Shanghai Stock Exchange, Shenzhen Stock Exchange and PRC inter-bank bond market.

The bonds are selected on the basis that they have remaining maturity between 4 and 7 years, bear fixed-rate interest and are denominated in Renminbi (CNY). The index is calculated in CNY on a total return basis, which means that any payments from the bonds are included in the index returns. It is reviewed and adjusted quarterly.

The index currently includes 35 onshore bonds issued by the Chinese government and has a yield-to-maturity of 3.38% with approximately five-year duration. By comparison, the yield on five-year UK government bonds is 1.49%.

China is currently rated AA- by Standard & Poor’s, Aa3 by Moody’s, and A+ by Fitch. Chinese authorities are implementing a series of economic reforms designed to turn the country into a fully-fledged market economy, including financial liberalisation.

“China’s domestic sovereign bonds provide a high yield relative to equivalent sovereign bonds of countries with similar credit ratings, so we anticipate demand for this ETF should be high. Investors will also be interested in the historically low correlation China’s domestic sovereign debt has to international fixed income and equity markets,” said Marco Montanari, Deutsche AWM’s Head of Passive Investments, Asia-Pacific.

“We are pleased to further our collaboration with Deutsche Asset & Wealth Management. As China’s market develops and opens further to foreign investors, we will continue to be at the forefront of creating new products to provide investors with access to the world’s second-largest economy,” said Peng Wah Choy, Chief Executive Officer of Harvest Global Investments.

The fund has a total expense ratio of 0.55% and is managed by Harvest Global Investments.

The launch of the ETF follows the January 2014 launch of the db x-trackers Harvest CSI 300 Index UCITS ETF (DR), which was Europe’s first physical replication ETF tracking China’s domestic CSI300 A-shares equity index.

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