On Thursday, Rayliant launched the world’s first active China equities ETF on the New York Stock Exchange. The Rayliant Quantamental China Equity ETF (RAYC) targets U.S. investors seeking long-term capital appreciation in China. Unlike passive ETFs, which track an index, Rayliant’s active strategy is designed to capture long-term excess returns in the world’s second-largest economy.

“This is a tremendous opportunity to generate alpha against all of the access products that are out there,” says Mark Schlarbaum, Managing Director, Head of Trading and Capital Markets.

He adds, “We’re the first product to really say China’s a huge market that we want to have access to. We’re offering a really smart quantitatively-driven active approach to investing in China equity markets, which historically have only been available through passive exposure.”

“We want to deliver a really excellent quantitative product that can weed out bad stock, and, over time, be that core product that an advisor would hold over a 3-5 year period of time, and will generate significant alpha over just the main exposure of A-shares to the CSI 300 Index, for instance.”

Keeping China Active

“Rayliant’s China ETF signals the next generation of China ETF investing,” said Jason Hsu, Ph.D., Rayliant’s Founder and CIO. “Until now, U.S. investors have been limited to passive or thematic China ETFs. In a market where retail trading accounts for more than 80% of overall volume, China is one of the few major markets where active management can consistently deliver outsized returns. Our RAYC gives U.S. investors opportunities to outperform the mainland China equity market.”

RAYC employs a systematic approach that exploits mispricing in Chinese stocks. The strategy is localized to China, applying specialized data and models capturing features that make Chinese markets unique, including novel aspects of China’s accounting, regulations, market structure, state ownership, and investor behavior.

ETF Trends Director of Research, Dave Nadig, thinks the product fills a natural niche for investors.  “Many investors just look to broad EM funds for their China exposure,” Nadig commented.  “There have been products that try to expand this through niche approaches or targeted indexes, but this is the first time we’re seeing a truly active approach to picking winners and losers in the local market.”

Hsu expanded on this. “We’re eliminating a lot of low-quality regional state enterprises. We’re also eliminating a lot of low-quality growth, and when people want to buy in China, they want to buy the upgrade in their consumer sector, and those tend to be high volume growth. There are also many people who want to buy in China because of a lot of the attractive stocks that go up, yet tend to have low-quality growth. You want to differentiate those if you want to be a successful long-term investor.”

Clean Data

When it comes to having necessary information, Hsu states, “We use data that is commercially and publicly available. There’s also hard to get data – data that you wouldn’t know exists because it’s not collected in the U.S., but it can be found. It’s data that’s being constantly discovered, cleaned, and incorporated into our database to research, helping us to fill in any gaps, adding to our process for global accounting.”

Schlarbaum adds, “We spent two years just on cleaning and improving the data, before even starting to build the product.”

“As active management in the ETF industry continues its remarkable growth, the NYSE is excited to support Rayliant in its launch of the first China equity actively managed ETF,” said Douglas Yones, Head of Exchange Traded Products, NYSE. “With the RAYC ETF, Rayliant extends the benefits of active management to all investors, continuing to further democratize international investing for everyone.”

For more information about Rayliant, please visit https://rayliant.com.

For more market trends, visit ETF Trends.