A China Bond ETF for a Defensive, Yield-Generating Play | ETF Trends

Global fixed-income investors are turning to Chinese sovereign bonds for stability and some extra yields. Investors seeking to diversify into China’s bond market can also consider a targeted exchange traded fund strategy.

According to CEIC data, foreign capital flowed into locally denominated Chinese government bonds over the second quarter at the fastest pace since late 2018, the Wall Street Journal reports.

International investors have increased their exposure to Chinese bonds in recent years after Beijing made it easier to trade the market and the securities were added to key bond indices in 2019. Furthermore, the relatively higher yields and stability of the Chinese bond market have attracted foreign investors.

“They’re really the one asset out there that’s both defensive and that’s offering you some yield,” Evan Brown, head of multiasset strategy at UBS Asset Management, told the WSJ. “If things go wrong—if global growth disappoints or there’s an increase in trade tensions or a flare-up in coronavirus, Chinese sovereign bonds will react with bond yields coming down.”

As the coronavirus pandemic swept through the globe, benchmark 10-year Chinese sovereign bond yields dipped to their the lowest point in over a decade over April – bond prices rise as yields fall.

While Chinese bond yields have pulled back, the yields are still higher than government debt issued by many of the world’s largest economies. China’s benchmark 10-year yields around 3.118%, compared to 0.597% for the U.S., 0.023% in Japan, and -0.515% in Germany.

“I’m not so sure that characterizing it as an emerging market is the correct thing to do anymore,” Stephanie Monier, chief investment officer at Lombard Odier, told the WSJ. “We see China as a safe haven for government bond issues.”

ETF investors who are interested in gaining exposure to Chinese sovereign debt can consider the VanEck Vectors ChinaAMC China Bond ETF (CBON), which seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the ChinaBond China High Quality Bond Index. The fund normally invests at least 80% of its total assets in securities that comprise the fund’s benchmark index. The index is comprised of fixed-rate, Renminbi (“RMB”)-denominated bonds issued in the People’s Republic of China (“China” or the “PRC”) by Chinese credit, governmental and quasi-governmental (e.g., policy banks) issuers (“RMB Bonds”). CBON shows a 2.34% 30-day SEC yield.

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