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Deutsche Bank lowers fees on China A-shares ETF

Jan 14, 2014 @ 12:14 pm

By Carl O'Donnell

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A week after a second ETF entered the Chinese A-share exchange-traded fund market, Deutsche Bank is cutting fees.

On Monday, Deutsche's db X-trackers Harvest CSI 300 China A-Shares Fund (ASHR) reduced its expense ratio from 1.08% to 0.82%. This follows last week's launch of a nearly identical ETF from Van Eck Associates, the Market Vectors ChinaAMC A-Share ETF (PEK), which has an expense ratio of 0.72%.

Both funds track the CSI 300, an index of the largest companies traded on Chinese exchanges. Many stocks on this index are only traded in China and are inaccessible to foreign investors, with the exception of a few licensed companies, called Renminbi Qualified Foreign Institutional Investors. Both PEK and ASHR gained access to the A share market through a partnership with one of these RQFIIs.

Some of the companies that trade in A shares include China's largest automaker, SAIC Motor, and its largest producer of fertilizer, Quinghai Salt Lake Industry, said Amrita Bagaria, an ETF product manager with Market Vectors.

Established in November, ASHR was the first ETF to offer direct access to Chinese A shares, which are renminbi-denominated and represent two-thirds of all Chinese stocks. The ETF had $108 million of seed funding, and has grown to $214 million. PEK was established in 2010, but until last week, replicated the returns of the CSI 300 using derivatives, rather than directly purchasing shares.

The main advantage of purchasing Chinese A shares directly is reduced counterparty risk, Ms. Bagaria said.

“When you enter into a swap or derivative agreement, you enter into a third-party agreement with a bank,” she said. “The agreement is in good faith, but there is always a risk that the bank won't be able to pay. Purchasing the shares directly cuts out the middleman.”

So far, neither of the funds have offered good returns. In the four-week period through Jan. 14, ASHR has seen losses of 8.87%. In the 12-month period through Jan. 14, PEK has seen losses of 17.61%. Over that same 12-month period, the CSI 300 fell 9.82%, according to Morningstar.

In the long term, these funds may be appealing to investors seeking to place a bullish bet on China's transition to a consumer economy. Generally, the companies listed on CSI 300 are more consumer-oriented than those listed in London or New York, said Mariana Bush, a senior analyst of exchange-traded products for Wells Fargo & Co.

“There are a lot of positive developments as China continues to liberalize,” said Patricia Oey, a senior fund analyst at Morningstar Inc. “The country is reopening the IPO pipeline, developing the local fund industry and opening up to foreign investors.”

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