China Bond ETFs: A Good Diversification Option? April 20, 2018

China Bond ETFs: A Good Diversification Option?

The recent geopolitical tension between the US and China has resulted in a spike in volatility within the stock market. The CBOE volatility index has surged from record low levels to 21.4 and several major indices like Dow Jones Industrial index has also declined about 10% from their January 2018 peak.

For the first quarter of 2018, growth stocks such as Facebook, Tesla and Alibaba have underperformed due to negative news and growth concerns due to the rising trade protectionism sentiments. It is usually during these periods that investors see the need to diversify their investment portfolio. Besides diversifying into the usual commodities such as gold ETF (O87.SI), investors can explore China bond ETFs. Some of the China bond ETFs are the US listed PowerShares Chinese Yuan Dim Sum Bond ETF (NYSE: DSUM) and KraneShares E Fund China Commercial Paper ETF (NYSE: KCNY).

What’s Good – Resilient performance

For the first quarter, DSUM and KCNY posted a return of about 5% and proved to be resilient during the February and March equity sell-down. The resilient performance was partly aided by RMB appreciation. RMB has appreciated 3% against USD year-to-date and may continue to appreciate given the pressure from US to reduce the trade deficit. This will help to lift the price performances of the ETF.

What’s Good – Political Stability

The recent removal of China presidential term limit has also instilled control and stability for the Chinese government in the long run. Coupled with the government’s current account surplus and strong foreign exchange reserves, these will put China in a better position to withstand potential financial shocks.

China Bond ETFs: A Good Diversification Option? China Bond ETFs: A Good Diversification Option?

What’s the Risk – Illiquidity

Compared to major ETFs, these ETFs are slightly more illiquid and will be more costly to buy or sell due to wider bid-ask spreads.

What’s the Risk – China’s high debt to GDP ratio

China’s high ratio is a key concern and the majority of this debt mainly comes from corporates. Investors should keep in mind of the financial risk and avoid overexposing your investment portfolio into China.

China Bond ETFs: A Good Diversification Option?

The following table shows the comparison of expenses and performances of DSUM & KCNY:

YTD Performance Expense ratio Performance since inception (per annum) Investment grade exposure
DSUM 6.33% 0.45% 3.08% Approximate 50%
KCNY 5.55% 0.57% 2.31% Minimum 80%

As of 31 Mar 2018

Clients will be able to access the ETFs mentioned in the article through Phillip’s award winning multi-market trading platform. As an ETF is classified as a Specific Investment product by the Monetary Authority of Singapore, clients looking to invest in such assets will need to pass an online Customer Assessment Review (CAR) assessment before they are allowed to place any orders. To participate in the US market, clients will need to submit W8-BEN form for US withholding tax purpose.

If you wish to know more about investing, feel free to approach your designated Trading Representatives or our friendly Representatives at a Phillip Investor Centre near you.


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About the author

Chiang Jin Liang
POEMS Dealer

Jin Liang is currently providing dealing services to over 8000 trading accounts and is part of the POEMS Dealing, the core in-house dealing department of Phillip Securities Pte Ltd.

Jin Liang believes in applying both fundamental and technical analysis in equities investing. He likes companies that can grow their earnings, stay relevant in an ever-changing landscape and focus on investor relations. Jin Liang frequently conducts educational seminars with the objective of imparting financial knowledge to the general public.

Jin Liang holds a Bachelor Degree in Electrical Engineering from Nanyang Technological University (NTU) and passed Level II of the Chartered financial Analyst (CFA) exam.

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