Van Eck Global, the tenth-largest U.S. issuer of exchange traded funds, introduced the Market Vectors ChinaAMC China Bond ETF (NYSEArca: CBON) Tuesday, the first U.S.-listed ETF designed to give investors exposure to China’s massive onshore bond market.
CBON, which tracks the ChinaBond China High Quality Bond Index (CDHATRID), holds government debt, quasi-sovereigns and high-grade corporate bonds. The new ETF, which charges 0.5% per year, has a modified duration of just 2.01 years and a yield to maturity of 3.93%, according to issuer data.
“China’s domestic bond market is expanding and evolving at the same time. While the full liberalization of the markets is likely to take a long time, movement towards greater access for borrowers and lenders, and a higher degree of market oriented financings such as bond issuance have already greatly broadened the opportunity set for local investors,” said Fran Rodilosso, senior investment officer for Market Vectors ETFs, in a statement.
As has been the case with China’s A-shares equity markets, the country’s enormous onshore bond market has been hard to access for most foreign investors. However, as is the case when it comes to A-shares equity ETFs, issuers are racing to launch Chinese onshore bond ETFs. Market Vectors struck first, but a competing fund from KraneShares is expected to debut in the coming weeks. Deutsche Bank and Global X are also eying competing ETFs. [Expect More A-Shares ETFs]
Issuers’ desire to increase offerings of Chinese onshore debt products is not surprising. Not only is Chian by far the largest emerging markets bond issuer, but its $1.5 trillion corporate bond market is the world’s largest.
“In June, credit agency Standard & Poor’s said the Chinese corporate bond market overtook the United States as the world’s biggest and is now set to soak up a third of global company debt needs over the next five years,” according to Reuters.
CBON’s top three issues, courtesy of Daqin Railway, China Development Bank and Anhui Conch Cement, combine for over 36% of the new ETF’s weight.
“China’s onshore bond market has had historically low correlation to core asset classes and has delivered attractive yields in comparison to developed bond markets in recent years,” added Rodilosso.
For example, Chinese government bonds yield around 4%, but 10-year U.S. Treasuries currently yield less than 2.4%.
Van Eck again partnered with ChinaAMC to gain a renminbi qualified foreign institutional investor (RQFII) quota for CBON. RQFII status is essential for investment firms to be a foreign owner of A-shares or Chinese onshore bonds.
Van Eck and ChinaAMC have previously partnered on the Market Vectors ChinaAMC A-Share ETF (NYSEArca: PEK), the oldest U.S.-listed A-shares ETF, and the Market Vectors ChinaAMC SME-ChiNext ETF (NYSEArca: CNXT).
CNXT, which debuted in July, provides exposure to the 100 most liquid mid- and small-cap stocks that trade on the Small and Medium Enterprise (SME) Board, China’s answer to the NASDAQ, and the ChiNext Board of the Shenzhen Stock Exchange (SZSE). [Another A-Shares ETF Debuts]
CBON Index Sector Breakdown
Table Courtesy: Market Vectors