ETFs Serve Up Dim Sum Bonds
September 28, 2011
Dim sum fever is heating up, and I’m not talking about the Chinese cuisine I love to eat, but rather the rapidly growing bond market in Hong Kong.
Dim sum bonds are renminbi-denominated bonds issued in Hong Kong by Chinese entities based in China and Hong Kong, as well as foreign companies. With the launch of two dim sum bond ETFs last week, investors now have an easy way to invest in this relatively new “offshore” Chinese bond market.
Guggenheim was the first issuer to launch such a fund, with the Guggenheim Yuan Bond Fund (NYSEArca: RMB) last Thursday. The next day, Invesco PowerShares launched the PowerShares Chinese Yuan Dim Sum Bond Portfolio (NYSEArca: DSUM).
Investors can expect more—several other such funds are in registration with the Securities and Exchange Commission, including the China Local Debt Fund from WisdomTree, the Dim Sum Bond Fund from Van Eck and the Offshore RMB Bond Fund from ETSpreads.
Guggenheim’s RMB seeks to replicate the AlphaShares China Yuan Bond Index, a modified market-value-weighted index that’s rebalanced monthly. The index currently consists of 37 securities that, according to the ETF’s prospectus, have an investment-grade rating by Moody’s, S&P and/or Fitch.
PowerShares’ DSUM aims to track the Citigroup Dim Sum (Offshore CNY) Bond Index. According to the prospectus, the index comprises unrated bonds and/or bonds rated below investment grade. DSUM now has 21 securities, with its top holding, China Government Bond, making up 17 percent of the fund.
The greatest appeal of these funds is their direct exposure to the Chinese currency. Since dim sum bonds are denominated in renminbi and the funds are priced in U.S. dollars, investors buying these funds are inherently long the renminbi relative to the U.S. dollar.
Until recently, investors looking strictly for renminbi exposure through ETPs had two options: WisdomTree’s Chinese Yuan Fund (NYSEArca: CYB) and Market Vectors’ Chinese Renminbi/USD ETN (NYSEArca: CNY).
But CYB and the Market Vectors ETN don’t directly invest in the renminbi. Rather, their exposure to the renminbi is through nondeliverable forward contracts. However, CYB can now hold renminbi-denominated money market instruments, according to a recent prospectus supplement.
While RMB and DSUM are the first of their kind to strictly hold renminbi-denominated debt, it’s important for investors to understand that dim sum bonds are based on the “offshore” CNH renminbi market, traded in Hong Kong and not the “onshore” CNY market.
The USD/renminbi exchange rates between the CNH market can sometimes diverge with the CNY market. I recently wrote about this possibility when Rydex filed with the SEC to launch the first physically backed renminbi-currency ETF.
Interestingly, in the past week, the CNH market—which has historically traded at a premium to the CNY market—started trading at a discount, with investors now expecting a near-term depreciation in the renminbi.
Investors interested in RMB and DSUM purely for renminbi appreciation should also remember that they’re bond funds. That means they still come with risks associated with other fixed-income products. These include interest-rate, liquidity and credit risk.
While RMB and DSUM may not be the “pure” currency play that many investors have been waiting for, these new ETFs still provide an exciting new way to play the renminbi and the nascent dim sum bond market, while getting some yield at the same time.
Disclosure: I am currently long CYB.