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New China and currency hedged ETFs launch

Competition is hotting up to give investors access to Chinese A-shares.
April 15, 2015

Hunger for Chinese equity ETFs has led to a new product launch from iShares, while Deutsche Bank has reduced costs to keep up the competition in this market.

BlackRock has opened up the Chinese equity market to retail investors by launching the iShares MSCI China A UCITS ETF (CNYA) on the London Stock Exchange. The ETF is the first to track the MSCI China A International Index, which offers exposure to mainland Chinese companies listed on the Shanghai and Shenzhen Stock Exchanges only available to foreign investors through tight quotas.

There has been a rush into the 'A'-share market following the launch of the Shanghai Hong Kong Connect programme last year, which offers retail investors greater access to mainland-listed Chinese stocks. The new iShares ETF has a total expense ratio of 0.65 per cent.

'A' shares have been strong performers and represent the largest single segment of the Chinese equity market. The Shanghai Composite Index of Chinese 'A' shares rose 58 per cent in 2014, according to data from the Shanghai Stock Exchange as at March 2015 and 'A' shares represent 45.6 per cent of the MSCI China All Share Index.

Until now, the majority of ETFs focused on China have tracked either the CSI300 index, made up of 300 'A' share large-cap stocks, or the FTSE China A50 Index, which comprises the 50 largest companies listed on the Shanghai and Shenzhen stock exchanges, weighted by free float market capitalisation.

The MSCI China A International index was launched in June 2014 with the aim of providing international investors with more diverse access to China 'A' shares. It has 221 large and mid-cap constituents and represents just the 'A' share chunk of the MSCI China All Shares index. The index differentiates from the traditional MSCI China A in that it includes the monitoring of foreign ownership limits.

BlackRock's move coincides with Deutsche Bank Asset Management's decision to chop the cost of its own successful China ETF, IC Top 50 ETF db x-trackers Harvest CSI300 Index UCITS ETF (RQFI) from 1.1 per cent to 0.65 per cent, the same annual charge as the new iShares product. RQFI was launched in January 2014, providing exposure to the 'A' shares market by tracking the CSI300 index, with financials representing 38 per cent. Both RFQI and CNYA physically buy the shares they invest in - something that a large number of China-focused ETFs do not offer.

Top ten holdings of MSCI China A International index

Holdings%  weight
Ping An Insurance A2.1
China Merchants Bank A1.9
Citic Securities Co A1.8
Industrial Bank A1.7
Shanghai Pudong Dev Bk A1.7
Agri Bank of China A1.6
China Minsheng Bank A 1.6
ICBC A1.5
Bank of Communication A1.5
Kweichow Moutai A1.4

Currency hedging

Currency-hedged ETFs have also been in vogue this month. Lyxor and BlackRock have both launched new products, with Lyxor handed licences for GBP and dollar daily currency hedged version of the new EURO STOXX 50 hedged indices, which it is offering at an ongoing charge of 0.20 per cent. The new products are the Lyxor UCITS ETF Euro Stoxx 50 Monthly Hedged C-GBP (GBP) (MSEX) and Lyxor UCITS ETF Euro Stoxx 50 Monthly Hedged C-USD (USD) (MSEU).

The EURO STOXX 50 index is just one of the five new indices launched by Stoxx. The provider has also launched the EURO STOXX Select Dividend 30, STOXX Europe 600 and STOXX Europe Select Dividend 30 indices but has so far not succeeded in luring ETF providers to build new ETFs on the back of them. However with European currency hedging a fast-growing trend in the ETF market that could soon change.

Currently iShares, UBS and Lyxor are the only ETF providers with hedged European ETFs. But Lyxor is the first to offer access to the popular STOXX indices.

BlackRock also launched the iShares MSCI Europe ex-UK GBP Hedged UCITS ETF (EUXS) and the iShares JPX-NIKKEI 400 EUR Hedged UCITS ETF (NK4E) this month. EUXS provides access to large and mid-cap companies from 14 developed European markets outside the UK, while NK4E's underlying index tracks highly liquid stocks with strong return-on-equity and good corporate governance.