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Update: db x-trackers MSCI China TRN Index UCITS ETF

H-Shares, Red Chips, P Chips, B-Shares: Dieser ETF bietet einen breit diversifizierten Zugang zu diversen chinesischen Aktiensegmenten. Das hohe Gewicht des Finanzsektors ist hier ein Wermutstropfen.   

Rolle im Portfolio

This 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.

From a sector perspective, the MSCI China Index is fairly concentrated in the financial sector which represents 36% of the index’s value as of this writing. It is also fairly concentrated at the individual security level--the index’s top 10 holdings account for 52% of its value.

Looking from a portfolio construction perspective, this ETF could offer some degree of diversification benefit for international investors, as evidenced by the historical correlations between the MSCI China Index and other global equity indices. Over the past three years, the MSCI China Index has been more correlated to emerging markets in Asia (correlated 93% to the MSCI EM Asia Index) than developed markets (correlated 78% to the MSCI World Index, 82% to the MSCI EAFE Index and 72% to the S&P 500 Index). During the same span it had a correlation of 56% to the MSCI China A Index, which tracks the domestic Chinese equity markets. Over the same time period, the MSCI China Index has had a standard deviation of 22%. This is higher than the MSCI World Index (14%) and the MSCI EM Asia Index (18%), but similar to the MSCI China A Index (22%).

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 -2.2% with standard deviation of 22%, while MSCI China A, measures the domestics Chinese A-Shares market returned -8.8% 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 achieved above-target growth in 2013. Gross domestic product growth clocked in at 7.7% in 2013, compared to a target of 7.5%. The economy appears to be set for another year of similar growth in 2014, and the government’s official growth target is again 7.5%, with the current run-rate (Q1 at 7.4%; Q2 at 7.5%) roughly on pace to reach the target. The continual liberalising of the Renminbi and the interest rate regime along with the further opening of the country’s capital market should benefit China in the long run.

While economic growth in China should still rank it amongst the fastest growing economies in the world, investing in Chinese equities is not without risk. In March 2014, the Chinese corporate bond market experienced its first default. Interbank borrowing rates spiked on a number of occasions in 2013. These events have seized investors’ attention and have increased scrutiny of the health and stability of China’s banking system.

The financial sectors account for 36% of the portfolio, the largest sector exposure for the ETF, consisting mainly Chinese banks (23%), insurance companies (7%) and real estate companies (5%). 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 Tencent (00700) (10%), China Mobile (00941) (8%), China Construction Bank (00939) (7%) and Industrial and Commercial Bank of China (01398) (6%).

The second largest sector exposure for this ETF is energy, accounting for 14% 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 fund’s third largest sector exposure for this ETF is information technology (13%), which is comprised mainly of the internet company Tencent (00700, 10%). Tencent’s share price has more than doubled in the past 12 months and the firm has made a number of acquisitions to expand its business.

The fourth largest sector exposure for this ETF is telecommunication services, accounting for 10% of the portfolio, including China Mobile (00941) (8%), 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.

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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Indexkonstruktion

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 140 constituents as of the end of June 2014. 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 36%. Other major sector weights include energy (14%), information technology (13%) and telecommunications (10%).

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Fondskonstruktion

The manager of the ETF has announced it will switch the ETF’s replication method from synthetic replication to physical replication. The switch will take place from 7 July to 31 December 2014. As a synthetic replication fund, this ETF utilises funded swap entered with counterparty Deutsche Bank AG to track the underlying index. Investors’ cash is transferred to Deutsche Bank in exchange for the index performance (net of swap fees and other costs), while Deutsche Bank puts collateral in a segregated account pledged to the ETF. As of end-June 2014, the collateral consists entirely of publicly-listed equities. The collateral is marked to market every day, and according to Deutsche Bank its total value as of end-June 2014 was 121% 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$221m.

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Gebühren

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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Alternativen

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 Deka MSCI China UCITS ETF (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 UCITS 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 around 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.