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Van Eck Associates, parent of the Market Vectors brand of exchange-traded funds, has announced that it is currently negotiating with a China-headquartered asset manager to serve as sub-advisor for the Market Vectors China ETF (PEK) in a move which could see the fund invest in physical A-shares.
The as yet unnamed sub-advisor expects to receive a Renminbi Qualified Foreign Institutional Investor (RQFII) quota soon which, pending approval by the Board of Trustees of Market Vectors ETF Trust, would allow the Market Vectors China ETF to have direct access to physical A-Shares.
The fund, which launched on October 13, 2010 and recently celebrated its third anniversary, already offers exposure to China A-shares as represented by the CSI 300 Index. However, the fund primarily gains this exposure by investing in swaps, the use of which entails certain risks, most notably counterparty risk. The use of swaps has tended to be viewed negatively by investors when compared to physical alternatives and likely explains the fund’s modest assets under management ($34m).
Shifting the fund’s assets into physically held A-shares would prove popular with investors. Deutsche Asset & Wealth Management recently launched a physical China A-shares ETF, the db X-trackers Harvest CSI 300 China A-Shares ETF (ASHR), in partnership with Harvest Global Investments, which made its debut with seed assets exceeding $100m, making it one of the most successful US ETF IPOs in recent years. The fund is linked to the same index as the Market Vectors product, thus demonstrating the appeal of a physical implementation.
A-Shares represent equity securities of companies incorporated in mainland China. These shares are denominated in Chinese Renminbi (RMB), and trade on the Shenzhen and Shanghai Stock Exchanges. The A-Share market was originally open to only domestic People’s Republic of China citizens. However, beginning in 2002, foreign investors were given access to the A-Share market via the Qualified Foreign Institutional Investor (QFII) quota program. The RQFII quota program was later introduced by the Chinese authorities in December 2011 and allows Hong Kong subsidiaries of fund management companies and securities houses from mainland China to launch RMB investment products in Hong Kong and invest in securities listed in mainland China.
Commenting on the development, Amrita Bagaria, ETF Product Manager at Market Vectors, said: “PEK’s prospectus has allowed for an RQFII sub-advisor for some time, so we are excited that the Chinese market has finally opened up so the fund can pursue utilizing this type of arrangement.”
As of September 30, 2013, the Market Vectors family of ETF had assets under management of $23.4 billion, making it the seventh largest provider of ETFs in the US and tenth largest worldwide.