What is an ETF?
An ETF is an open-ended fund that can be traded like a share on the security exchange. An index-tracking ETF is a listed collective investment scheme that aims to track the performance of the underlying index. The underlying index can be on a security market, a segment of the security market, or even bonds and securities.
How does an ETF track the performance of its underlying index?
Tracking is usually achieved by using full replication or representative sampling, or synthetic replication strategies.
Using a full replication strategy means that an ETF will invest in the constituent securities of the underlying index in substantially the same weightings as these securities have in the index. Hence, the performance of the ETF will match the performance of the underlying index as closely as practicable. CSOP FTSE China A50 adapts the full replication strategy to represent the performance of FTSE China A50 Index.
An ETF adopting a representative sampling strategy holds a sample of securities that have similar features such as market capitalisation, industry weights and liquidity to the underlying index. ETFs that use this strategy tend to have a higher risk of tracking error than those using a replication strategy. Due to the liquidity limit of China government bond, CSOP RQFII China Bond ETF adapts this representative sampling strategy to closely track the performance of The China 5-year Treasury Bond Index.
A synthetic replication strategy means that the ETF will invest in financial derivative instruments to replicate the index performance. There are additional risks associated with such strategy that are not found in the above two strategies.
RQFII & RQFII ETF
What is RQFII scheme?
RQFII is a new policy initiative of the Mainland authorities which allows qualified RQFII holders to channel RMB funds raised in Hong Kong to be invested into the PRC securities markets. RQFII holders may issue public or private fund or other investment products using their RQFII quotas. RQFII funds give retail investors access to invest in PRC securities markets as they can invest RMB directly into the PRC bond and equity markets (including the inter-bank bond and exchange-traded bond market) through the RQFII quotas. Subscriptions and redemptions of units in the fund must be settled and paid in RMB.
What is RQFII ETF?
RQFII ETF is a RMB-denominated physical ETF. Through the RQFII investment quota granted by Mainland authorities, an RQFII ETF seeks to track the performance of an index by channeling the RMB raised outside mainland China to invest directly in a portfolio of securities issued in China mainland. RQFII ETFs are traded on the Stock Exchange of Hong Kong (SEHK) like stocks. Like other ETFs listed on the SEHK, RQFII ETFs must be authorized by the SFC before they can be offered to the investing public. Investors are reminded that they should read the ETF's offering document(including Product Key Facts)carefully to understand its key features and risks before making an investment.
PRC onshore Bond Market & China Treasury Bond Introduction
What are the major types of bonds in PRC bond market?
The major types of bonds available in the PRC inter-bank bond market can be grouped into six broad categories: (i) PRC Treasury Bonds issued by Ministry of Finance of the PRC; (ii) Central bank bills issued by the PBOC; (iii) Policy bank bonds issued by policy banks, including China Development Bank, Export-Import Bank of China and Agricultural Development Bank of China; (iv) Financial bonds, including commercial bank bonds and non-bank financial institution bonds; (v) Non-financial credit bonds issued by non-financial institution corporates, including enterprise bonds, commercial papers (“CP”), and medium-term notes (“MTN”) and (vi) other types of bonds such as local government bonds. Bonds issued by Central Huijin Investment Limited, China Railway Corporation and Ministry of Railway, foreign bonds issued by foreign entities, asset-backed securities and mortgage-backed securities etc.
What is the PRC Treasury Bond?
PRC Treasury Bond is debt instrument issued by Ministry of Finance of the PRC. As of 30 Novermber 2013,the outstanding amount of PRC Treasury Bonds in the inter-bank bond market is over RMB 7,500 billion. It has a wide range of tenors and is one of the most liquid types of bonds in the secondary market. For the period December 2012 to November 2013,the daily trading volume of PRC Treasury Bonds is approximately RMB 24 billion and the number of daily trades is about 164. With the approval of the National People's Congress, PRC Treasury Bonds are backed by the PRC sovereign credit.
CSOP China 5-Year Treasury Bond ETF
What is CSOP China 5-Year Treasury Bond ETF?
CSOP China 5-Year Treasury Bond ETF is a "physical" exchange traded fund ("ETF") meaning it will hold actual PRC treasury bonds that are issued by the Ministry of Finance of the PRC (the "PRC Treasury Bonds") through the Renminbi Qualified Foreign Institutional Investor ("RQFII")investment quota granted to the Manger by the State Administration of Foreign Exchange.
CSOP China 5-Year Treasury Bond ETF aims to provide investment results that, before fees and expenses, closely correspond to the performance of the ChinaBond 5-year Treasury Bond Index (the "Index").
CSOP China 5-Year Treasury Bond ETF adopts a representative sampling strategy to achieve its investment objective. A representative sampling strategy involves investing in a representative sample of securities that collectively has an investment profile that reflects the profile of the Index.It is intended that the Sub-Fund will invest not less than 80% of its NAV in the PRC Treasury Bonds included in the Index which have a term to maturity of over 4 years and less than 7 years, through the RQFII investment quota granted to the Manager by the State Administration of Foreign Exchange (the "SAFE").
What is ChinaBond 5-year Treasury Bond Index?
ChinaBond 5-year Treasury Bond Index (the "Index") is an index compiled and published by the China Central Depositary & Clearing Co., Ltd (“CCDC” or “Index Provider”).
Although both the name of the Index and the ETF refer to “5-Year”, 5-year is only the average maturity of the bonds comprising in the Index. The Index comprises bonds with term to maturity ranging from 4 years to less than 7 years and the ETF may invest in bonds with term to maturity of less than 10 years.
The Index comprises fixed-rate interest bearing PRC Treasury Bonds that has a term to maturity of over 4 years and less than 7 years. The Index was launched on 25 January 2013 with a base level of 100 on 31 December 2007. As at 17 January 2014, the Index had a total capitalisation of RMB 1,298.8 billion and 48 constituents. The Index is a total return index.
The Index is compiled and published by CCDC.In order to build up a safe, efficient and low-cost bond market, People's Bank of China and the Ministry of Finance of the PRC jointly proposed to establish CCDC. With the approval of the State Council of the PRC, CCDC was set up to undertake the function of centralised depository and settlement for the inter-bank bond market.
CCDC has been established for more than 10 years and has been using ChinaBond as its product brand name and the ChinaBond portal as its official website (http://www.chinabond.com.cn). The Index Provider’s English website was introduced in 2007. (http://www.chinabond.com.cn/Site/cb/en).
The Index Provider introduced the ChinaBond indices in 2007. Since the PBOC, the CSRC, the China Banking Regulatory Commission (“CBRC”) and the China Insurance Regulatory Commission (“CIRC”) have endorsed the Index Provider’s valuation and calculation model in the domestic bond market, ChinaBond indices were soon extensively adopted by market participants for investment analysis, performance measurement and asset allocation. Many domestic leading asset managers work with the Index Provider to benchmark their investment performance for fixed income mutual funds. As at November 2013, the ChinaBond Index family has a total number of 44 indices and some of these indices were among the first to serve as underlying for domestic index tracking funds.
The Manager (and each of its Connected Persons) is independent of the Index Provider.
How will the dividends be paid out?
The Manager intends to distribute income to Unitholders quarterly in January, April. July and October having regard to the ETF's net income after fees and costs. The Manager will make an announcement prior to any distribution in respect of the relevant distribution amount in RMB only. Each Unitholder will recieive distributions in RMB only (whether holding RMB traded Units or HKD traded Units).
The Manager may, at its discretion, pay dividend out of capital. The Manager may also, at its discretion, pay dividend out of gross income while all or part of the fees and expenses of the ETF are charged to/paid out of the capital of the ETF, resulting in an increase in distributable income for the payment of dividends by the ETF and therefore, the ETF may effectively pay dividend out of capital. Payments of dividends out of capital or effectively out of capital amounts to a return or withdrawal of part of an investor’s original investment or from gains attributed to that original investment. Any distributions involving payment of dividends out of the ETF’s capital or effectively out of capital may result in an immediate reduction in the Net Asset Value per Unit.
What is "dual-currency trading"?
Investors can invest in this ETF using either HKD or RMB. If the broker can support Dual Counter trading, investor can buy units traded in one counter and sell them in the other counter as units traded in both counters are inter-transferable in real time. Units traded in RMB counter can be transferred to HKD counter by way of an inter-counter transfer and vice versa on a one to one real time basis. In general, for the purpose of affecting an inter-counter transfer, an investor would instruct their broker to submit an executed "Multi-Counter Transfer Instruction" to the Hong Kong Securities Clearing Company Limited(HKSCC).
There is no limit on this conversion. Under the dual counter model with transferability, where an investor buys HKD-traded securities and subsequently converts them into RMB-traded securities and sells them on the RMB counter, the transactions do not actually involve a net increase of RMB funds in the offshore market. It only entails the transfer of RMB funds in the offshore market from one investor to another.
HKSCC will charge HKD 5 dollars for each effected Multi-counter Transfer Instruction.
Can I use the Renminbi Equity Trading Support Facility (“TSF”) to buy CSOP China 5-year Treasury bond ETF?
Investors should note that the Renminbi Trading Support Facility (the “TSF”) launched by HKEx only supports stocks trading in RMB, ETFs related to capital stocks and REITs in this stage. Hence,.It is not made available for fixed income ETFs. As such, if an investor does not have sufficient RMB, it will need to source RMB from other channels or it will only be able to buy units of the ETF through the HKD counter.
What are the main risk factors investing in CSOP China 5-year Treasury bond ETF?
First PRC Treasury Bond ETF Risk
The ETF is one of the first PRC Treasury Bond ETF listed on the SEHK. As such the Manager, the trustee and certain service providers connected to the ETF have no operating experience with regard to a PRC Treasury Bond ETF. The listing, trading and settlement of RMB denominated Securities have not been done very much in Hong Kong and there is no assurance that there will not be problem with the systems or that other logistical problems will not arise. In case of any such problem, there can be no assurance that the listing, trading and settlement of Units will be capable of being implemented as envisaged.
The ETF will utilize the Manager’s RQFII quota. If the Manager is unable to obtain additional RQFII quota when the current quota is reached, the Manager may suspend creation of units and the trading price of a unit may be at a significant premium to the NAV of each unit.
Dual Counter Risk
The ETF has dual counter traded units which are traded and settled in both RMB and HKD. It may bring additional risks as the SEHK’s dual counter model in Hong Kong is relatively new. Investors without RMB accounts may only buy and sell HKD traded units. Such investors will not be able to buy or sell RMB traded units and should note that distributions are made in RMB only. Investors may suffer a foreign exchange loss and incur foreign exchange associated fees and charges to receive their dividend.
Secondary Market Trading Risk
Retail investors can only buy or sell units on SEHK. The trading price of the units on SEHK is subject to market forces and may trade at a substantial premium or discount to the NAV per unit. As investors will have to pay certain charges (e.g. brokerage and trading fees) in dealing with the units on the SEHK, investors may pay more than the NAV per unit when buying units on the SEHK and may receive less than the NAV per unit when selling units on the SEHK.
Sovereign Debt Risk
The ETF invests in PRC Treasury Bonds which are sovereign debt securities and such investments involve special risks. A PRC governmental entity’s ability to repay principal and interest due in a timely manner may be affected by its cash flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the PRC governmental entity’s policy towards the International Monetary Fund and the political constraints to which a PRC governmental entity may be subject.
Single Country Risk
The exposure of the ETF is concentrated in the PRC and may be more volatile than funds adopting a more diversified strategy. The Index is concentrated in PRC Treasury Bonds and so the ETF may be adversely affected by the performance of those securities, may be subject to increased price volatility and may be more susceptible to adverse economic, market, political or regulatory event affecting the PRC generally.
RMB Trading and Settlement of Units Risk
The limited availability of RMB outside of the PRC may also affect the liquidity and trading price of the RMB traded units.
Dividends Payable out of Capital Risk
The Manager may, at its discretion, pay dividends out of capital. The Manager may also, at its discretion, pay dividends out of gross income while all or part of the fees and expenses of the ETF are charged to/paid out of the capital of the ETF, resulting in an increase in distributable income for the payment of dividends by the ETF and therefore, the ETF may effectively pay dividends out of the capital. Payment of dividends out of capital or effectively out of the capital amounts to a return or withdrawal of part of an investor’s original investment or from any capital gains attributable to that original investment. Any distributions involving payment of dividends out of the capital or effectively out of the capital of the ETF may result in an immediate reduction of the NAV per Unit.
Representative Sampling Risk
The ETF only holds a representative sample of securities that represents the profile of the Index and may invest in bonds not included in the Index. The number of Index constituents invested by the ETF depends on the fund size of the ETF. The bonds held by the ETF may also be over or underweight relative to those PRC Treasury Bonds in the Index. It is therefore possible that the ETF may be subject to larger tracking error than other traditional ETFs that fully replicates the Index, other factors such as fees and expenses, and inability to rebalance the ETF’s holdings in response to changes to the Index may also cause tracking error.
Passive Investment Risk
The Sub-Fund is not actively managed and will not adopt any temporary defensive position against any market downturn. Therefore when there is a decline in the Index, the Sub-Fund will also decrease in value. Investors may suffer significant losses accordingly
The above risks are not exhaustive. Investors should refer to the ETF's Prospectus and the Product Key Facts for further details, including the product features and risk factors.
Is there any difference between trading RQFII A-shares ETF & RQFII Bond ETF?
||RQFII A-share ETFs
||RQFII Bond ETFs
||Direct investment in the Mainland securities market through RQFII investment quota
||Direct investment in the Mainland bond market through RQFII investment quota
||Full replication or represent the composition of the underlying A-share index
|Listing on SEHK
||RMB / HKD
||RMB / HKD