Plan sponsors looking for exposure to fixed income opportunities in China face hefty barriers, particularly when it comes to things like access, capacity and plain old transparency. But help might be on the way, with the recent launch of a handful of new ETFs offering exposure to so-called “dim sum” or Chinese bonds: the Guggenheim Yuan Bond ETF, Van Eck’s Market Vectors Renminbi Bond ETF (CHLC) and Invesco’s PowerShares Chinese Yuan Dim Sum Bond Portfolio.
These three renminbi-demonated ETFs track the return on Chinese bonds, offering exposure to Yuan-denominated assets for investors banking on the potential of the Chinese currency to rise even further in the months and years ahead. And if you believe this recent article in Pensions and Investments, which declared emerging markets bonds a new safe haven for investors, then these ETFs could be worth a glance at some point.
The thing is, right now, they’re probably not ready for pension funds …yet. To start, they’ve been badly hit by the recent spate of market volatility, with both the PowerShares ETF and the Guggenheim ETF headed down since September. PowerShares has dropped six per cent since it launched on September 23 and Guggenheim has fallen two per cent since it launched three weeks ago.
And volatility isn’t the only reason they might not be ready for prime time on the institutional front: this article in the Financial Times points out that dim sum bond ETFs face some major issues on the liquidity front, especially because demand continues to exceed supply in the renminbi bond market. ETFs need liquidity to create or redeem shares but the average daily turnover in renminbi bonds on the secondary market at a lowly US$47 million.
That’s pretty hard to swallow for plan sponsors focused on liquidity.
While it’s too soon to tell if dim sum ETFs will thrive in the coming months (or years), they could open a potential new door for pension funds seeking a low cost way to add incremental exposure to a growing asset class. However, time will tell if they’re ready to dig into the opportunity.