As we previously mentioned in the article “RQFII A-Share ETFs – “Do’s and Don’ts” when “Meeting the Indices””, an increasing number of RQFII ETFs are lined up for listing on the Stock Exchange of Hong Kong (SEHK). The prospectuses for the two newest additions - the E Fund CSI 100 A-Share ETF (83100) and the CSOP FTSE China A50 ETF (82822) - were released on 20 August 2012. These will be the second and third RQFII ETFs to be listed on the SEHK, on 27 and 28 August 2012 respectively. Below we discuss important implications for investors and take a look at the key features of these new RQFII ETFs.
Areas to Watch Out For:
· They are physical ETFs - These RQFII ETFs are physical replication ETFs which invest directly in A-Shares. Hence, these ETFs do not expose investors to the type counterparty risks inherent to synthetic replication ETFs that use access products or swaps to gain exposure to the A-Share market.
· The underlying index:
o The E Fund ETF is the first ETF to track the CSI 100 Index, which is made up of the 100 largest stocks within the CSI 300 Index. The CSI 300 Index is one of the most popular domestic China equity indices tracked by ETFs.
o The CSOP ETF tracks the FTSE China A50 Index. This is the second ETF tracking this index after the iShares FTSE A50 China Index ETF (02823), which is the largest A-Share ETF in the marketplace with AUM of HK$44.4 billion as of 20 August 2012.
· TER (Total Expense Ratio) – The E Fund ETF levies a TER of 0.99%, equal to that of the first RQFII ETF, the ChinaAMC CSI 300 Index ETF (83188). Meanwhile, the CSOP FTSE China A50 ETF (82822) levies a TER of 1.15%.
· Impact of these ETF launches - Comparing the CSOP FTSE China A50 ETF (82822) and the iShares FTSE A50 China Index ETF (02823), which track the same index (i.e. FTSE China A50 Index), we see that the CSOP ETF levies a lower TER (1.15% vs iShare’s 1.39%). Besides, the CSOP ETF uses physical replication, thus potentially becoming an interesting alternative to the iShares FTSE A50 China Index ETF (02823) which uses synthetic replication using China A-Share Access Products (see our research report). We would expect some investors may switch from the iShares ETF to the new CSOP ETF. If in significant numbers, the iShares ETF’s share price premium over its NAV could narrow going forward (e.g. less market demand on the iShares ETF as an alternative becomes available). For information, iShares’ ETF’s share price stood at a premium of 2.96% over its NAV as of 21 August 2012; the average premium in August thus far was 2.85%.
· Which ETF for whom? - The CSI 100 Index and FTSE China A50 Index have a more concentrated portfolio (i.e. 100 and 50 constituent stocks respectively) than the CSI 300 Index (i.e. 300 constituent stocks), with a higher focus on the financials sector (50% and 62% respectively vs. 38% for the CSI 300 Index). Amongst the three listed RQFII ETFs, investors looking for a more diversified portfolio can consider the ChinaAMC CSI 300 Index ETF (83188); while investors with a positive view on the financials sector would be better served by the E Fund CSI 100 A-Share ETF (83100) or the CSOP FTSE China A50 ETF (82822).
Key Features of the Two New RQFII ETFs and the Existing RQFII ETF
E Fund CSI 100 A-Share ETF (83100) | CSOP FTSE China A50 ETF (82822) | ChinaAMC CSI 300 Index ETF (83188) | |
Manager | E Fund Management, one of the three largest asset management companies in China by asset management E Fund’s total AUM was around US$31bn as of 30 June 2012 | CSOP Asset Management (a subsidiary of China Southern Fund Management) China Southern Fund Management’s total AUM was US$29bn as of 31 December 2011 | China China |
Underlying Index | CSI 100 Index | FTSE China A50 Index | CSI 300 Index |
For a comparison of different key domestic Chinese equity indices, please read our article “RQFII A-Share ETFs – “Do’s and Don’ts” when “Meeting the Indices”” | |||
Listing Date | 27 August 2012 (which may be postponed by the manager to a date no later than 27 September 2012) | 28 August 2012 | 17 July 2012 |
Listing Exchange | Stock Exchange of Hong Kong (SEHK) | ||
Initial RQFII Quota | Rmb2 billion | Rmb5 billion | Rmb5 billion |
Minimum Creation (through Participating Dealers): | 200,000 units | 500,000 units | 150,000 units |
Creation/ Redemption Policy | Cash (RMB) only | ||
Replication method | Full Replication | Full Replication | Primarily full physical replication (The manager may also use a representative sampling strategy) |
China Withholding Tax Treatment | These ETFs intend to provide for 10% withholding tax on potential capital gains tax liabilities. We believe that this is a more prudent approach than that adopted by some existing ETFs that have not provided for potential capital gains taxes embedded in their A-Share exposures | ||
Distribution Policy: | Annually (usually in October) | Annually (in December) | Annually (usually in July) |
0.99% | 1.15% | 0.99% |
ETF Website
E Fund CSI 100 A-Share ETF (83100): www.efunds.com.hk/fund.html
CSOP FTSE China A50 ETF (82822): www.csopasset.com/etf (to be available soon)
ChinaAMC CSI 300 Index ETF (83188): http://etf.chinaamc.com.hk/HKen/CSI300
Full prospectus
E Fund CSI 100 A-Share ETF (83100):
English: http://www.hkexnews.hk/listedco/listconews/SEHK/2012/0820/LTN20120820096.pdf
Chinese: http://www.hkexnews.hk/listedco/listconews/SEHK/2012/0820/LTN20120820095_C.pdf
CSOP FTSE China A50 ETF (82822):
English: http://www.hkexnews.hk/listedco/listconews/SEHK/2012/0820/LTN20120820008.pdf
Chinese: http://www.hkexnews.hk/listedco/listconews/SEHK/2012/0820/LTN20120820007_C.pdf
ChinaAMC CSI 300 Index ETF (83188):
English: http://www.hkexnews.hk/listedco/listconews/sehk/2012/0709/LTN20120709126.pdf
Chinese: http://www.hkexnews.hk/listedco/listconews/sehk/2012/0709/LTN20120709125_C.pdf
Jackie Choy is an ETF Strategist with Morningstar.
