China Post Global has announced the launch of the Market Access STOXX China A Minimum Variance Index UCITS ETF, the first smart beta ETF on China to launch in Europe.
China Post Global has launched a low volatility China A-Shares ETF in Europe
The ETF, which is to be rolled out across multiple European exchanges, aims to provide investors with exposure to China’s onshore stock markets – known as China A-shares – with lower volatility than comparable passive funds.
It sets out to achieve this by tracking the STOXX China A 900 Minimum Variance Unconstrained AM (Accessible Market) Index, an index developed by Stoxx with involvement from China Post Global and insight from Axioma risk-factor models.
The index implements an optimised minimum variance approach where eligible stocks are selected and weighted so as to reduce portfolio risk. The index is unconstrained, meaning it can deliver a purer minimum variance strategy with lower volatility compared to indices which have to maintain a similar exposure profile to the parent index.
That said, the index does apply certain capping constraints, such that maximum weights are not exceeded, whereby a component cannot have a weight more than 8%, and the sum of all those which have at least 4.5% weight cannot exceed 40%. The index also takes into account trading volumes to ensure that the resultant portfolio is liquid.
It currently consists of 135 constituents, the top five of which are China Yangtze Power, CRRC, Jiangsu Hengrui Medicine, Industrial and Commercial Bank of China and Agricultural Bank of China.
Despite the constraints, the index has achieved considerably lower volatility than the parent Stoxx China A 900 Index. Over the past five years, the minimum variance version has recorded annualised volatility of 21.3% compared to 24.3% for the parent index. Moreover, performance has also been superior, with the minimum variance index delivering a return of 18.3% compared to 10.5% for the parent index. To achieve these returns, the index experienced annualised tracking error of 6.9% – reflecting the unconstrained nature of the index.
The portfolio managers make use of China’s Stock Connect programmes, which enable equities listed in Shanghai and Shenzhen to be traded internationally via the Hong Kong stock exchange. This reduces transaction costs significantly compared to trading locally via the QFII and RQFII quota programmes for investing in mainland Chinese stocks.
The ETF is likely to appeal to investors who have sought exposure to Chinese equities but have been inhibited by risk budgets and to those looking for a cost-effective alternative to actively managed China A-share funds.
Commenting on the launch, Danny Dolan, Managing Director of China Post Global (UK), said, “China has for some time been the primary engine of global growth and there is significant investor demand for China exposure, though in many cases allocations are being held back by concerns about higher volatility.
“The minimum variance approach works to address these volatility concerns while maintaining sufficient liquidity, aiming to give investors access to higher risk-adjusted returns in the medium- and long term.”
The ETF uses full physical replication and has a total expense ratio of 0.65%. It will be listed on the London Stock Exchange, SIX Swiss Exchange, Deutsche Börse and China Europe International Exchange and is registered in the UK, Austria, Germany, Italy, Luxembourg, Netherlands and Switzerland.
China Post Global is the promoter and global distributor of Market Access ETFs, which it acquired from RBS in March 2016. It has offices in Hong Kong and London and is the international asset management arm of China Post Fund, a large asset manager in mainland China established in 2006.
Performance and annual returns
(Stoxx data from Dec. 21, 2007 to May 31, 2018)