There are roughly 260 exchange traded funds offering access to China, the world’s second-largest economy. None offer investors direct access to China’s A-shares, which trade in Shanghai and Shenzhen.
That will change Wednesday when Deutsche Asset & Wealth Management, the ETF unit of Deutsche Bank, introduces the db X-trackers Harvest CSI 300 China A-Shares Fund (NYSEArca: ASHR).
Deutsche’s partnership with Harvest Fund Management, China’s second-largest asset manager, is a key element in the bank being able to offer an A-shares ETF that holds actual equities. Harvest is a Renminbi Qualified Foreign Institutional Investor (RQFII), which means it meets Chinese regulatory requirements to be a foreign owner of A-shares.
The China ETFs U.S. investors are most familiar with, including the iShares China Large-Cap ETF (NYSEArca: FXI) and the SPDR S&P China ETF (NYSEArca: GXC), hold H-Shares, which trade in Hong Kong, London or New York.
Rival A-shares products such as the Market Vectors China ETF (NYSEArca: PEK) and the newly minted, actively managed PowerShares China A-Share Portfolio (NYSEArca: CHNA) hold swaps on A-shares indices, not actual stocks, though CHNA is seeking RQFII approval. [Exposure to China A-Shares With ETFs]
ASHR will start with a gross expense ratio of 1.08%, but Deutsche expects that will be reduced as the fund accumulates assets. The new ETF will track the CSI 300 Index, a collection of the largest stocks trading in Shanghai and Shenzhen.
Top holdings in the index include China Minsheng Banking, China Merchants Bank, Industrial Bank, Ping An Insurance, Shanghai Pudong Development Bank, Haitong Securities and China Vanke.
While ASHR is a new spin on China ETFs, it does offer investors leverage to prominent areas of the China investment thesis. For example, Deutsche Bank China Strategist Lin Li noted on a conference call Monday that health care spending there could increase in the coming years as China looks to relax its one-child policy by 2016. [A Fundamental Approach to China ETFs]
“Foreign investment in China is currently about 1.5%, but to get to the goal of 11%, that would require a seven-fold increase,” said Deutsche Managing Director Martin Kremenstein on the call. “It is possible that foreign investment in China A-shares could reach the mid-teens.”
That prediction could prove prophetic. Although there is no shortage of diversified emerging markets ETFs that offer exposure to China, the country could take on an even more prominent role in those funds if the country’s fully liberalizes the A-shares market. That could force index providers to boost China to nearly a third of the weight in various emerging markets indices.
And that could be why Kremenstein called ASHR “the most exciting product we’ve launched in the past six years.”
In the futures, ASHR could also be a play on the growth of China as a legitimate emerging markets dividend destination,
“We’ll start to see dividends become more a part of the China story,” said Kremenstein. “I think we’ll see China become more dividend-focused.”
China is currently the largest emerging markets dividend payer in dollar terms.
Deutsche’s other emerging markets ETFs include the db X-trackers MSCI Emerging Markets Hedged Equity Fund (NYSEArca: DBEM) and the db X-trackers MSCI Brazil Hedged Equity Fund (NYSEArca: DBBR).