Deutsche Asset & Wealth Management (DeAWM) and China's Harvest Global Investments listed an RQFII China small-cap index exchange-traded fund – the world's first – in New York yesterday.
The db X-trackers Harvest CSI 500 China A-Shares Small Cap Fund tracks the CSI 500 index, which comprises the most liquid 500 smallest-cap A-share firms.
Though the CSI 500 has fallen 2.1% year-to-date, the product was launched because the index is not available in Hong Kong, says Marco Montanari, head of passive management for Asia Pacific at DeAWM.
“The underlying is currently more difficult to hedge because the index doesn’t have futures. But they may soon be launched,” he adds.
The ETF raised $6 million from its IPO, with most investors hailing from Asia. It is relatively small compared with the db X-trackers Harvest China Fund, which tracks the CSI 300 index and launched last year on the New York Stock Exchange (NYSE). The CSI 300 ETF raised $108 million in its IPO subscription.
The db X-trackers Harvest MSCI All China Equity Fund listed on the NYSE on April 30. The ETF tracks the MSCI All China Index, which comprises China stocks listed in Hong Kong, China, Singapore and the US. The fund raised $6.5 million from its IPO.
Montanari says the firm is considering listing a Ucits version of the CSI 500 ETF on European bourses.
The CSI 500 RQFII ETF received Rmb1 billion in quota from China’s State Administration of Foreign Exchange. It follows a full replication strategy and its expense ratio is 0.82%, according to Bloomberg.
Sector ETFs next
DeAWM and Harvest also plan to list seven sector RQFII ETFs on NYSE, which were approved by the US Securities and Exchanges Commission in March.
The sector ETFs will track the technology, materials, industrial, healthcare, financial, consumer staples and consumer discretionary CSI 800 indices, which comprise the most liquid 800 China A-shares in each sector.
Harvest, the sub-adviser responsible for running the products, has applied for quota for the ETFs, says the firm's CEO, Choy Peng Wah. But the timing of the products’ launches depends on market conditions, notes Montanari.
“We have been marketing and talking to European and US investors,” says Choy. “Their interest in China is very much in place. But timing is an issue. There has been a lot of negativity surrounding the slowing of China’s economy, its property sector and even technology.”
While the products are not expected in the next few weeks, Montanari says the firm aims to list them before competitors enter the market.
“China is not the best performing market in the world, but we want to have first-mover advantage,” says Montanari. “The US ETF market is the largest in the world, and being the first is important.”
DeAWM and Harvest listed the first RQFII ETF outside Hong Kong in November on the NYSE. The firms later listed a Ucits version of the ETF in the UK, Germany and Italy. DeAWM is considering listing its Ucits CSI 300 RQFII ETF on the Six Swiss Exchange, says Montanari.
In June last year, Harvest received Rmb800 million ($128 million) in quota for an actively managed equity RQFII fund, which it launched in February. The fund is almost fully subscribed.