China Bond ETFs to Generate Yield and Diversify Rate Risk | ETF Trends

The U.S. bond market is getting battered as traders exit in anticipation of higher rates. However, fixed-income exchange traded fund investors are not limited to U.S. investments and can diversify rate risk with foreign exposure.

For example, the PowerShares Chinese Yuan Dim Sum Bond Portfolio (NYSEArca: DSUM), which has $133.1 million in assets under management, tracks Chinese Renminbi (RMB)-denominated bonds issued by governments, agencies, supranationals and credit securities, excluding synthetics, retails and CDs. DSUM has an effective duration of 2.6 years and a 30-day SEC yield of 3.24%.

Additionally, the Market Vectors Renminbi Bond ETF (NYSEArca: CHLC), which has $5.3 million in assets, provides another option for following Chinese Renminbi-denominated investment grade bonds or bonds from parent companies with investment grade ratings. CHLC has an effective duration of 1.64 years and a 2.52% 30-day SEC yield.

While China may be an emerging market, the two Chinese bond ETFs provide exposure to relatively safe investment-grade bonds. DSUM has a 49% weight to investment grade bonds rated BBB and above, whereas CHLC has 57.1% in investment grade bonds.

The Chinese bond ETFs have also been outperforming U.S. government bonds as Fed tapering speculation ramped up rates in the U.S. DSUM is up 6.1% year-to-date while CHLC is up 4.5% this year.

In comparison, the iShares 1-3 Year Treasury Bond ETF (NYSEArca: SHY), which has a similar relatively similar duration of 1.83 years, only returned 0.3% year-to-date. Additionally, SHY comes with a smaller 0.16% 30-day SEC yield.