Analyse: db x-trackers MSCI China

Steht der Come-back chinesischer Aktien bevor? Dieser ETF bietet einen breit gestreuten Zugang zu diversen China-Aktien-Segmenten.  

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Rolle im Portfolio

The db x-trackers MSCI China TRN Index UCITS ETF is best suited as a core building block for a portfolio, offering exposure to the MSCI China Index, which is composed of the large and mid-cap mainland China companies across H-Shares, Red Chips and P Chips listed in Hong Kong and B-Shares listed in China, which are the major non-domestic Chinese securities available to non-domestics investors. For investors building a global portfolio, this ETF can also be used as a tactical tool to bet on non-domestic mainland China companies.

Over the past three years, the MSCI China has been more correlated to the Asian emerging markets (correlated 91% to the MSCI EM Asia Index) than developed markets (correlated 74% to the MSCI World Index, 74% to the MSCI EAFE Index and 66% to the S&P 500 Index). These figures indicate that this ETF could offer some degree of diversification benefit for international investors. It is worth noting that, over the past 3 years, this index has had a correlation of 56% to the MSCI China A Index which tracks the domestic Chinese equity markets. The MSCI China Index tracks the non-domestic Chinese equity market -- across China H-Shares, B-Shares, Red Chips, P-Chips. Over this same time period, this index has had a standard deviation of 22%. This is much higher than the MSCI World Index (15%) but similar to the MSCI EM Asia Index (19%) and the MSCI China A Index (22%).

From a sector perspective, the MSCI China Index is fairly concentrated in the financial sector which represents 39% of the index’s value as of this writing. At the individual security level, the index’s top 10 holdings account for 52% of its value.

Prior to investing in this ETF, we advise investors to check their existing exposure to domestic and non-domestic Chinese equity markets to avoid unintentional concentration. While both the domestic and non-domestic Chinese equity markets are driven by the Chinese economy, the two types of markets could offer different risk/reward profiles and may be subject to different exchange regulations and market forces. Over the past 3 years, on an annualised basis, the MSCI China Index, returned -3.1% with standard deviation of 22%, while MSCI China A, measures the domestics Chinese A-Shares market returned -8.2% with standard deviation of 22%.

Overall, investors should be reminded that the Chinese economy could be affected by the global economy and local monetary and fiscal policies.  

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Fundamentale Analyse

China’s GDP grew 7.8% in Q3 2013, putting its GDP growth for the first three quarters of 2013 at 7.7%. The Q3 reading is well within the range needed to achieve the government’s annual target of 7.5% growth. While 7.5% growth would mark the slowest pace in 11 years, at this rate of growth, China will likely continue to be ranked amongst the fastest growing countries in the world. We believe further liberalising the Renminbi and the interest rate and opening China’s capital market should ultimately benefit China as a whole. It appears the current crop of leaders is heading towards this path.

However, there are other risks facing China. In our opinion, the direction of interest rate policy has been less clear lately since the last rate cut (July 2012) and the lowering of the reserve requirement ration (RRR, May 2012). Elsewhere, the US, Europe and Japan all extended and expanded their easing programmes since the second half of 2012. Risks to the health of Chinese banks are another matter catching investors’ attention, especially in the wake of the spike of inter-bank borrowing rates 0069n June.

The financial sectors account for 39% of the portfolio, the largest sector exposure for the ETF, consisting mainly Chinese banks (25%), insurance companies (7%) and real estate companies (6%). Investors should be aware of any changes to the Chinese banking regulations and the effects it could have on incumbents’ market share. China Life Insurance (3%) and Ping An Insurance (2%), the largest Chinese insurance companies are also included in the portfolio. The performance of shares of Chinese insurance companies is inherently linked to the domestic China A-Share market itself as insurance companies invest their surplus in local equity markets.

Individual constituents with weights over the 5% mark, include China Mobile (00941) (9%), China Construction Bank (00939) (8%), Tencent (00700) (8%), Industrial and Commercial Bank of China (01398) (7%) and CNOOC (00883) (5%).

The second largest sector exposure for this ETF is energy, accounting for 15% of the portfolio.  This exposure consists of oil and coal companies. These energy companies are not only exposed to global energy prices but also to Chinese regulations in the energy sector and their overseas expansion strategies, if any.

The third largest sector exposure for this ETF is telecommunication services, accounting for 11% of the portfolio, including China Mobile (00941) (9%), a telecommunication services giant, which is also the largest component of the ETF’s portfolio. The Chinese telecommunication services industry is subject to local regulation and rapid technological changes.

Internet company Tencent (00700) accounts for 8% of the portfolio, being the 3rd largest holding. Tencent is a leading internet firm that provides instant messaging, social networking, gaming, and mobile value-added services. The company’s stock price has been continually hitting new record highs over the past 6 months.

While the underlying stocks are mostly listed in Hong Kong and share prices quoted in Hong Kong dollars, the businesses derive the majority of their income in Mainland China. As a result, the underlying stocks are indirectly exposed to fluctuations in the Renminbi (RMB). 

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This ETF tracks the MSCI China Index which is a free float-adjusted market capitalisation weighted index. Chinese companies across H-Shares, Red Chips and P Chips listed in Hong Kong and B-Shares listed in China are eligible for index inclusion, where (1) H-Share companies refer to companies incorporated in mainland China and approved by the China Securities Regulatory Commission (CSRC) for a listing in Hong Kong; (2) Red Chips are companies controlled by the state or a province or municipality; (3) P Chips are run by private sector China businessmen and (4) B-Share companies are incorporated in China, and traded on the Shanghai and Shenzhen exchanges. B Shares only account for less than 1% of the index. The total market value of the constituents covers 84% of the eligible universe as of this writing. The index is reviewed and re-balanced on a quarterly basis. The index has 137 constituents as of the end of October 2013. The index is top heavy with the 10 largest constituents accounting for 52% of the total market capitalisation of the index. The index has a concentration in the finance sector, at 39%. Other major sector weights include energy (15%) and telecommunications (11%).

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This ETF employs synthetic replication to track the underlying index by entering into a funded swap with counterparty Deutsche Bank AG. Investors’ cash is transferred to Deutsche Bank, which then puts collateral in a segregated account pledged to the ETF. As of end-October 2013, the collateral consists mainly of publicly-listed equities, as well as roughly 8% corporate and government bonds. The collateral is marked to market every day, and according to Deutsche Bank its total value as of end-October 2013 was 119% of the ETF’s net asset value. Collateral is subject to certain margins and the amount is required to be 100% to 120% of the exposure. Collateral will be held by the custodian, State Street Bank Luxembourg S.A. Under the terms of the swap, the counterparty agrees to provide the ETF with exposure to the total return of the underlying index, net of any costs or fees associated with providing the exposure. The return from the swap assumes that all dividends paid by the underlying stocks are reinvested in the index, after the deduction of any taxes that may apply. This ETF does not pay out any dividend distributions. The ETF will not enter into stock lending transactions. The fund has assets of roughly US$140m.

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The ETF levies a total expense ratio (TER) of up to 0.65%. This sits in the middle of the ETFs tracking the same or similar indices.

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This ETF is listed in Hong Kong, Singapore and various exchanges in Europe. There are seven other ETFs that track the MSCI China Index, including the ETFlab MSCI China (EL46, listed in Germany),  HSBC MSCI China ETF (03033, listed in Hong Kong), and a Europe version of the HSBC MSCI China ETF (HMCH, listed in various exchanges in Europe), the iShares MSCI China Index ETF (02801, listed in Hong Kong; and iShares MSCI China ETF (MCHI, a US version of the ETF listed in the US)), Horizons MSCI China ETF (03040, listed in Hong Kong) and Source MSCI China ETF (MXCS). Compared to these alternatives, the Horizons MSCI China ETF has a TER at the low end (0.25%) followed by the HSBC MSCI China ETF listed in HK having a TER of 0.5%. All these alternatives are physical ETFs.

Investors may also consider ETFs that track other non-domestic Chinese market indices, e.g. the FTSE China 25 Index, HSCEI and MSCI China H Index, which all have a correlation of 99% with the MSCI China Index. 

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Über den Autor

Morningstar ETF Analysts  research hundreds of ETFs available to European investors. The Morningstar Rating for ETFs is based on a risk-adjusted performance measure.