China-focused ETF issuer KraneShares has launched its first fixed income ETF in Europe providing exposure to renminbi-denominated government and policy bank bonds issued in China.
Jonathan Krane, CEO of KraneShares.
The KraneShares Bloomberg Barclays China Bond Inclusion UCITS ETF (KBND LN) has listed on the London Stock Exchange, tradable in US dollars.
The fund tracks the Bloomberg Barclays China Treasury and Policy Bank 9% Capped Index through physical replication using a sampling technique.
The index covers fixed-rate RMB-denominated treasury and policy bank bonds traded in the China interbank bond market. Eligible securities must be rated investment grade and have a minimum of one year to maturity.
Three policy banks are included in the index – China Development Bank, Agricultural Development Bank, and Export-Import Bank of China – which are responsible for financing economic and trade development as well as state-invested projects. The weight of each bank is constrained to 9% in the index with Chinese treasury bonds accounting for the remaining 73%.
The ETF may appeal to investors searching for increased yield – the underlying index is currently yielding 2.5% – without venturing into junk bond territory. It may also serve as a portfolio diversifier as Chinese bond yields have historically exhibited a near-zero correlation with US, German, and Japanese government bonds.
The fund comes with moderate interest rate risk with the underlying index showing an effective duration of 6.3 years. Portfolio income is distributed to investors on a semi-annual basis.
The fund comes with an expense ratio of 0.35%
The 0.35% fee matches that of the $390m iShares China CNY Bond UCITS ETF (CNYB NA), the largest China bond UCITS ETF. The iShares ETF tracks a similar index; however, exposure to individual policy banks is uncapped. The fund is presently yielding 2.4% with an effective duration of 5.6 years.
Also priced at 0.35% is the Goldman Sachs Access China Government Bond UCITS ETF (GASF GY). The GSAM fund is linked to the FTSE Goldman Sachs China Government Bond Index and targets bonds issued by the Chinese treasury and regional Chinese governments.
Bond market liberalization
China’s onshore bond market is the second-largest globally yet less than 3% is owned by foreign investors.
However, foreign ownership is poised to expand rapidly, driven by better access channels and greater alignment of China’s bond market with international standards. Demand is expected to also receive a boost from the inclusion of China in major global indices.
Index provider Bloomberg has already begun this process, adding Chinese sovereign and bank policy bonds to the flagship Bloomberg Barclays Global Aggregate Index according to a 20-month inclusion schedule running from April 2019 to November 2020.
China’s weight in the global benchmark is predicted to reach 6% by the end of the inclusion process which is expected to attract around $150 billion of fund inflows into China’s $13 trillion bond market.
Jonathan Krane, CEO of KraneShares, commented, “With attractive yields and low correlations relative to other government bond markets, China fixed income presents a compelling opportunity. We’re proud to partner with Bloomberg Barclays on KBND which is an important fund marking a key milestone of the evolution of China’s fixed income market for the asset management industry.”
Steve Berkley, CEO of Bloomberg Index Services, said, “Our goal at Bloomberg is to provide innovative solutions in indexing. The inclusion of RMB-denominated bonds in Bloomberg’s fixed income indexes is a significant development for China’s integration with global financial markets. We are excited to partner with KraneShares to make the Bloomberg Barclays China Treasury and Policy Bank Index investable through KBND.”