ETF issuers in Europe continued to expand their offerings across all asset classes this year despite increasing pressure on business structures resulting from the coronavirus turmoil.
One of my favourite ETF launches in 2020 offers exposure to the second largest bond market in the world, China, which has been improving the accessibility for international investors over the past 12 months.
In March, UBS Asset Management launched the UBS ETF JP Morgan CNY China Government 1-10 Year Bond UCITS ETF (JC11), enabling investors to access a $13trn market.
Tracking the JP Morgan China Government + Policy Bank 20% Capped 1-10 Year index, JC11 is comprised of government and policy bank bonds denominated in Chinese renminbi.
Chinese government bonds account for 45.6% of JC11’s benchmark with the remainder of the index being made up of bonds from China Development Bank, Agricultural Development Bank of China and Export-Import Bank of China accounting for 20%, 20% and 14.4%, respectively.
Additionally, the index's exposure to each of the three policy bank issuers is capped at 20%.
The launch by UBS AM coincided with Chinese government bonds’ inclusion in several flagship global fixed income indices, the year after Chinese equity stocks were included.
The widely followed Bloomberg Barclays Global Aggregate Bond index included Chinese sovereign and policy bank bonds last year while FTSE Russell announced plans to make a similar inclusion in its global bond index in 2021.
As a result of this, both the equity and fixed income markets in China have become easier to access for foreign investors but given the size of China’s bond market, it is becoming too big to ignore.
UBS AM underpriced BlackRock’s $6.2bn iShares China CNY Bond UCITS ETF (CNYB) which launched in July 2019 by two basis points at 0.33%.
Despite being mid-priced with the rest of the market, JC11 has only captured $35m assets since its inception which could easily grow as more investors want to gain exposure to the market.
FTSE Russell argued the wider index inclusions could see $100bn inflows into the Chinese market as investors become increasingly interested in the growing asset class.
Following significant inflows into numerous China bond ETFs this year, Peter Sleep, senior portfolio manager at 7IM, told ETF Stream that investors entering the market using the ETF wrapper can benefit from a cheap exposure, attractive yields and beneficial diversification from the rest of the market.
According to Schroders, the Chinese government bonds market has a correlation of 0.05 with UK and US government bonds as well as a 0.07 correlation with German bunds which could become very beneficial as markets respond differently to the coronavirus crisis recovery.
The Chinese bonds’ inclusion in flagship indices offers a modest initial weighting of 5-10% despite being the second largest market in the world. This does suggest the weighting could easily grow and naturally see more assets flow into the market.
ETFs with this exposure as a whole have seen attractive inflows this year and next year looks equally as promising for the asset class making JC11 an exciting product to follow in 2021.
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