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Update: db x-trackers MSCI China Index UCITS ETF

H-Shares, Red Chips, P Chips, B-Shares und N-Shares: Hinter dieser Buchstabensuppe verbergen sich die verschiedenen China-Aktiensegmente, die in MSCI China ETFs vertreten sind. Festlands-Aktien find sich hier indes nicht. 

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 (and N-Shares listed in New York from 30 November 2015), 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 represented 41% of the index’s value as of end-October 2015. From 30 November 2015, “foreign listed companies”, such as Alibaba and Baidu, will become eligible for potential inclusion into the MSCI China Index. Investors should assess the impact of this change on their respective sector and single stock exposures.

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 90% to the MSCI EM Asia Index) than developed markets (correlated 54% to the MSCI World Index, 58% to the MSCI EAFE Index and 43% to the S&P 500 Index). During the same span it had a correlation of 70% 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 20%. This is higher than the MSCI World Index (11%) and the MSCI EM Asia Index (13%).

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 5% with standard deviation of 20%, while MSCI China A, measures the domestics Chinese A-Shares market returned 20% with standard deviation of 30%.

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Fundamentale Analyse

China’s 2015 Q3 GDP growth came in at 6.9%. This was the first time since 2009 that China’s GDP growth fell below 7%. Also, this is lower than the 7% growth registered in both Q1 and Q2, and slower than the 7.4% growth posted in 2014. Note that the government’s full year GDP growth target was set at “around 7%”. In the long run, China should benefit from the ongoing liberalisation of the Renminbi and its interest rate regime, as well as further opening of its capital market. However, the Chinese stock market’s plunge in June and July 2015 has led to increased government intervention. Investors should take a step back and assess how these actions might impact the market. This is especially relevant from a fundamental (i.e. risk/return) and regulatory standpoint.

While high-single digit economic growth should still rank China amongst the fastest growing economies in the world, investing in Chinese equities is not without risk.  In the past year, the People’s Bank of China (PBoC) has become more aggressive with its monetary easing. It reduced the reserve requirement ratio (RRR) on a broad-base in October, August, April and February 2015 and cut rates in October, August, June, May, and February of 2015 as well as in November 2014.

Financial sector stocks account for 42% of the portfolio. Financials are the ETF’s largest sector exposure, comprised mainly of Chinese banks (22%), insurance companies (10%) and real estate companies (4%). Investors should be aware of any changes to the Chinese banking regulations and the effects it could have on incumbents’ market share. Ping An Insurance (3%) and China Life Insurance (3%), 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) (12%), China Mobile (00941) (9%), China Construction Bank (00939) (7%) and Industrial and Commercial Bank (01398) (6%).

The fund’s second largest sector exposure for this ETF is information technology (14%), which is comprised mainly of the internet company Tencent (00700, 12%). Tencent’s share price has almost doubled in the past 24 months and the firm has made a number of acquisitions to expand its business.

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 second 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). 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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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 85% of the eligible universe as of this writing. The index is reviewed and re-balanced on a quarterly basis. The index has 143 constituents as of the end of October 2015. From 30 November 2015, “foreign listed companies”, such as Alibaba and Baidu, will become eligible for potential inclusion into the MSCI China Index. The change will be implemented in two phases, by adding half the foreign listed companies’ free float-adjusted market cap in November 2015 and the remaining half in May 2016. The index is top heavy with the 10 largest constituents accounting for 51% of the total market capitalisation of the index. The index has a concentration in the finance sector, at 41%.

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Fondskonstruktion

Effective from 16 December 2014, the ETF switched from synthetic replication to physical replication. The ETF utilises full replication to track the index. The ETF is allowed to engage in securities lending in order to improve tracking performance. Deutsche Bank AG through its Frankfurt head office and its London and New York branches, acts as the lending agent. The ETF may lend out a maximum of 30% of its portfolio (6.63% as of18 November 2015; collateralized at 108% of the value on loan). According to the securities lending policy, the collateral amount is required to be 100-110% of the exposure of the lent asset and the collateral may comprise stock, bonds and cash. Lending revenue is split 70/30 between the ETF and the lending agent, respectively. db x-trackers fully discloses all details pertaining to securities lending for this ETF in its website.

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Gebühren

The ongoing charges based on expenses for the financial year ended 31 December 2014 was 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 other ETFs that track the MSCI China Index, including the Deka MSCI China UCITS ETF (EL46, listed in Germany),  the HSBC MSCI China UCITS 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%). All these alternatives are physical ETFs.

Investors may also consider ETFs that track other non-domestic Chinese market indices, e.g. the FTSE China 50 Index and HSCEI, which all have a correlation of 96-99% with the MSCI China Index.

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Über den Autor

Morningstar ETF Analysts  Alan Rambaldini is an ETF analyst with Morningstar.