Analyse/db x-trackers FTSE China 25

Wer in diesen chinesischen Indexfonds investiert, setzt zu einem großen Teil auf den Bankensektor. Das hohe Konzentrationsrisiko wird durch eine Indexerweiterung indes ab September 2014 relativiert.

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Rolle im Portfolio

The db x-trackers FTSE China 25 offers exposure to many of the largest and most liquid Chinese equities available to international investors. Given its concentrated portfolio, this ETF is best suited as a satellite holding for investors looking for China mega-cap exposures.

From a sector perspective the FTSE China 25 Index is heavily tilted towards the financial sector which represents 54% of the index’s value as of end-February 2014. At the individual security level, the index’s top 10 holdings account for 63% 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 FTSE China 25 Index and other global equity indices. Over the past three years, the FTSE China 25 Index has been more correlated to emerging markets in Asia (correlated 89% to the MSCI EM Asia Index) than developed markets (correlated 74% to the MSCI World Index, 75% to the MSCI EAFE Index and 66% to the S&P 500 Index). Meanwhile, during this same span it only had a correlation of 58% to the MSCI China A Index, which tracks the domestic Chinese equity markets. Over the same time period, the FTSE China 25 Index has had a standard deviation of 24%. This is higher than the MSCI World Index (14%), the MSCI EM Asia Index (19%) and 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, FTSE China 25 Index returned -5.4% with standard deviation of 24%, while the MSCI China A Index returned -9.9% with standard deviation of 22%. It is also worth noting that the FTSE China 25 Index will become the FTSE China 50 Index and have 50 constituents effective from the close of trading on 19 September 2014. We would advise investors to assess the resulting impact on their portfolios, and in particular the resulting changes in sector exposure.

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%. 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 financials sectors accounts for 54% of the portfolio, the largest sector exposure for the ETF, consisting mainly of Chinese banks (around 35%). 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 (4%) and Ping An Insurance (4%), 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.

The second largest sector exposure for this ETF is telecommunications, accounting for 14% 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.

The ETF’s third largest sector exposure is to the technology, accounting for 13% of the portfolio, which is comprised exclusively of its stake in the internet company Tencent (00700) (13%), which is also the fund’s largest single holding. 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.

This ETF’s fourth largest sector exposure is to the oil & gas sector, which accounts for 12% of the portfolio. The oil & gas sector combines with the basic materials sector to comprise 16% of the fund’s portfolio.  This exposure consists of oil companies including Sinopec (00386) (5%), PetroChina (00857) (4%), CNOOC (00883) (4%), and coal companies such as China Shenhua (01088) (4%). These oil & gas and basic materials companies are not only exposed to global energy prices but also to Chinese regulations in the energy sector and their ambitions for overseas expansion.

While the underlying stocks are listed in Hong Kong and share prices are quoted in Hong Kong dollar, 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 FTSE China 25 Index, which is a free float adjusted market capitalisation weighted, liquidity screened index consisting of 25 stocks trading on the Stock Exchange of Hong Kong. The constituents consist of H-Shares, Red Chips and P Chips with a 10% cap on each constituent. With respect to constituent stocks whose individual weighting exceeds 5%, the weighting of such constituent stocks is capped at 40% in aggregate. H-Shares are companies incorporated in the People’s Republic of China (PRC) and listed in Hong Kong. Unlike China-listed A-shares, there are no restrictions for international investors trading in H-shares. Red Chips are companies incorporated outside the PRC but with at least half their sales coming from mainland China and at least 30% of their shares held by mainland Chinese entities while P Chips are companies that are controlled by Mainland China individuals, with the establishment and origin of the companies in Mainland China and at least 50% of their revenue or assets derived from Mainland China. Stocks are screened for liquidity and selected to represent the largest companies on the exchange. The index is reviewed quarterly and changes are made as needed. Financials make up by far the largest sector of the index, representing 54% at the end of February 2014. Other meaningful sector weights include telecommunications at 14%, technology (13%) and oil & gas at 12%.

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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 entirely of publicly-listed equities. The collateral is marked to market every day, and according to Deutsche Bank its total value as of end-February 2014 was 120% 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$232m.

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The ETF levies a total expense ratio (TER) of 0.60%. This sits at the low end of the range for ETFs tracking the same or very similar indices. Other costs potentially borne by the unitholder but not included in the TER include swap fees, bid-ask spreads, transaction costs on the infrequent occasions when the underlying index holdings change, and brokerage fees when buy and sell orders are placed for ETF shares.

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This ETF domiciled in Luxembourg and is cross-listed in Hong Kong, Singapore and various exchanges in Europe. In addition, there are 4 other ETFs that track the FTSE China 25, including the CIMB FTSE China 25 (0823EA, listed in Malaysia), Hang Seng FTSE China 25 Index ETF (02838, listed in Hong Kong and Taiwan), EasyETF FTSE China 25 (EXC, listed in France), iShares China Large-Cap (FXC, listed in various exchanges in Europe and Australia; also FXI, listed in the US, Mexico and Chile). Compared to these alternatives, the iShares one is larger as measured by AUM while this ETF, db x-trackers FTSE China 25 UCITS ETF, charges the lowest TER.

Investors may also consider ETFs that track other non-domestic Chinese market indices, e.g. the HSCEI Index, MSCI China Index and MSCI China H 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