db x-trackers CSI300 Index UCITS ETF 1D (USD) | KT4 |
von
Jackie Choy, CFA28.03.2013
Rolle im Portfolio
This ETF offers exposure to the CSI 300 Index, which is composed of the largest and most liquid stocks in the domestic China A-share market. The total market capitalisation of the constituents of the index represents around 70% of the A-Share market. China maintains tight capital controls and only domestic Chinese investors, Qualified Foreign Institutional Investors (QFIIs) and RQFIIs (R stands for Renminbi) are able to invest directly in the A-Share market. Given its pure exposure to the China A-Share market, this ETF is best suited as a core building block for a China-focused portfolio, but can also be used as a tactical bet on the China A-Share market for investors with a global portfolio. The CSI 300 Index has been a good diversifier with correlation of 52% the MSCI World and 54% to the MSCI EAFE Index over the past 3 years. It is worth noting that this index has had a correlation of 55% to the MSCI China Index which tracks the non-domestic Chinese equity markets (H shares, B shares, Red Chips, and P Chips).
The CSI 300 Index is tilted towards the financial sector which represents 41% of the index’s value as of end-February 2013. At the individual security level, the index’s top 10 holdings account for 24% of its value. In considering an investment in this ETF, we draw investors’ attention to a comment regarding its tax treatment. The ETF’s auditor has stated that fund’s manager considers that the charge for Chinese tax on gains on A-Shares is uncertain and that it has not made adjustments for potential taxable gains. See “Product Construction” section for a more detail discussion.
This ETF uses funded-swaps to synthetically track the index. Foreign investors investing in A-Shares are subject to QFII quotas and the swap counterparty, Deutsche Bank, being a QFII, has its own quota limit. Once the quota is reached, the swap counterparty may not be able to hedge its position, resulting in its inability to issue additional swaps and potentially disrupting the creation and redemption process. This could lead the fund’s market price to stray from its NAV. Investors should note that changes to the QFII regulations in China may be made at any time by the Chinese government. One of the potential impacts includes narrowing of premium in the case of increase or abandonment of QFII quota, and vice versa. In November 2012, the CSRC has approved an increase of the overall RQFII quota to RMB 270 billion from RMB 70 billion.
Fundamentale Analyse
China’s new leaders have come onboard to lead the country for the next 10 years. It appears as though the new leaders will continue liberalising the Renminbi (RMB) and further opening China’s capital market, which should ultimately benefit China as a whole. China’s GDP growth slowed to 7.8% in 2012 from 9.2% in 2011. The government set a target for GDP growth of 7.5% for 2013. While 7.5% growth would mark the slowest pace in 11 years, GDP growth in Q4 2012 was 7.9% YoY, accelerating from the 7.4% rate seen in Q3, and marking the first increase after 7 straight quarters of decline. In addition, at this rate of growth, China will likely continue to be ranked amongst the fastest growing countries in the world.
Chinese policies have in the past had a large influence on the Chinese stock market as a whole as well as specific sectors. We expect the influence to be continued. However, the future direction of interest rate policy, being one of the key policy tools, has been less clear lately since the last rate cut (July 2012) and lowering of the reserve requirement ration (RRR, May 2012) whereas the US, Europe and Japan all extended and expanded their easing programmes in the second half of 2012.
The financial sector accounts for 41% of the portfolio, the largest sector exposure for the ETF, consisting mainly of Chinese banks (23%). Investors should be aware of any changes to the Chinese banking regulations and the effects it could have on incumbents’ market share. Ping An Insurance (3%), the largest non-bank component of this ETF, is the second largest insurance company in China by total market capitalisation, after China Life Insurance. The performance of shares of Chinese insurance companies is also inherently linked to the China A-Share market itself as insurance companies invest their surplus in local equity markets.
The second largest sector exposure for this ETF is industrials, accounting for 14% of the portfolio, followed by materials (11%), consumer discretionary (9%), energy (7%) and consumer staples (7%). The industrials, consumer discretionary and consumer staples sectors are subject to export demand (e.g. for machinery and other exported consumer goods) and domestic growth, while the materials and energy sectors are not only exposed to global energy prices but also to Chinese regulations in the energy sector and their overseas expansion strategies, if any.
The underlying stocks are listed on the Shanghai and Shenzhen Exchanges and quoted in Renminbi (RMB) while the funded-swaps are denominated in US dollars and the ETF is listed in Hong Kong and quoted in Hong Kong dollars. RMB has risen around 30% since it was de-pegged from the US dollar in 2005. The future course of the RMB remains in debate, especially as various countries’ easing programmes continue. Factors including, but not limited to, whether the US would label China as a currency manipulator and appreciation/depreciation of the US dollar against other major global currencies could affect the value of the RMB.
Indexkonstruktion
The CSI 300 Index is provided by the China Securities Index Company Limited (CSI), a joint venture between the Shanghai Stock Exchange and the Shenzhen Stock Exchange. It is one of the most widely quoted indices inside and outside Mainland China. The CSI 300 Index is a free float adjusted market capitalisation-weighted portfolio comprising the A shares of 300 large Chinese companies trading on the Shanghai Stock Exchange or the Shenzhen Stock Exchange. It is a price index, meaning it measures only price appreciation without taking into account dividends paid by the constituents. An advisory committee has certain subjective leeway in selecting the constituents. For inclusion in the index, stocks must have been listed for more than three months, must be in the most liquid 50% of all A shares, must not have had financial problems or legal/regulatory infractions, must not have exhibited large price volatility that shows evidence of manipulation, and must be considered appropriate by the committee. Once those screens are run, the 300 largest stocks are included. The underlying stocks are reviewed on a semi-annual basis and changes are made as needed. To control portfolio turnover, there are buffer zones around the index’s inclusion criteria, so that a constituent is not automatically removed if it fails to meet all the initial standards. Financials make up the largest sector of the index, representing 41%, followed by Industrials (14%) and Materials (11%).
Fondskonstruktion
This ETF employs synthetic replication to track the underlying index by entering into a funded swap with counterparty Deutsche Bank AG. Investors’ cash is transferred to Deutsche Bank, which then puts collateral in a segregated account pledged to the ETF. As of end-February 2013, the collateral consists mainly of publicly-listed equities, as well as roughly 11% corporate and government bonds. The collateral is marked to market every day, and according to Deutsche Bank its total value at the time of writing was 119% of the ETF’s net asset value. Collateral is subject to certain margins and the amount is required to be 100% to 120% of the exposure. Collateral will be held by the custodian, State Street Bank Luxembourg S.A. Under the terms of the swap, the counterparty agrees to provide the ETF with exposure to the total return of the underlying index, net of any costs or fees associated with providing the exposure. The fund pays out dividends from the underlying exposure on an annual basis. The impact of dividends will likely cause the fund to consistently outperform its benchmark before fees, which is a price index. Dividend proceeds will be held by the fund until they are paid out. The ETF will not enter into stock lending transactions. The swap counterparty has its own QFII quota limit. Once the quota is reached, the swap counterparty may not be able to hedge its position, causing a disruption to the creation and redemption process. This could, in turn, result to the fund’s market price to stray from its NAV. Investors should be aware that this premium can change upon the change of regulation on QFII quotas and rules. Under Chinese corporate tax rules, 10% withholding tax may be charged on the gains derived from the sale of A-Shares by QFIIs. However, withholding tax has only been enforced on dividend and interest payments from PRC listed securities. The State Administration of Taxation has not collected and has not shown intention to collect the tax that applies to sales of A-Shares held by QFIIs. According to the ETF’s accounting policy, no provisions of the withholding tax are being made. According to the ETF’s 2011 annual report, total potential tax of US$0.4m and US$1.9m is exposed for class 1D (listed in Singapore) and 2D (listed in Hong Kong) respectively, representing 1.6% and 0.6% of the ETFs’ assets under management as of December 2011.
Gebühren
The ETF levies a total expense ratio of 0.5%. This lies at the low end of the ETFs focused on Chinese equities. When investing ETFs, investors should take a holistic approach to assessing the total cost of ownership, also noting other costs including, but not limited to, swap fees, brokerage commissions, bid-offer spreads and tracking error. Tracking error for this ETF, measured on an annualised basis on a daily returns, was 0.8% over the past year.
Alternativen
There are a number of ETFs tracking the CSI 300 Index. Possible alternatives include the ChinaAMC CSI 300 Index ETF (listed in Hong Kong), CS ETF (IE) on CSI 300 (listed in various exchanges in Europe), iShares CSI 300 A-Share Index ETF (listed in HK), Market Vectors China ETF (listed in the US), W.I.S.E. – CSI 300 China Tracker (listed in Hong Kong), W.I.S.E. KTAM CSI 300 China Tracker (listed in Thailand) and W.I.S.E. Polaris CSI 300 Securities Investment Trust Fund (listed in Taiwan). Amongst these ETFs, all, but the ChinaAMC CSI 300 Index ETF, are synthetic ETFs, while the two ETFs listed in Thailand and Taiwan are feeder funds that invest in the Hong Kong listed W.I.S.E – CSI 300 China Tracker. The ChinaAMC ETF levies a TER of 0.99%.
There are many other ETFs that track “Chinese” equities. Investors should note that these non-domestic China indices could have a low correlation with the domestic A-Shares indices, e.g. The CSI 300 Index (domestic) has a correlation of 96% with the FTSE A50 China Index (domestic) and 99% with MSCI China A Index (domestic), but only 55% to the MSCI China Index (non-domestic) during the past 3 years.
