RMB bond ETF
What is a renminbi bond exchange traded fund (RMB bond ETF)?
An RMB bond ETF is an ETF that has the principal objective of tracking, replicating or generating returns which closely mirror an underlying index comprised of renminbi bonds. You can find out more about how an ETF references an index.
The underlying index of an RMB bond ETF may comprise of renminbi bonds issued outside of mainland China ("offshore renminbi bonds") or within mainland China ("onshore renminbi bonds").
Offshore renminbi bonds issued in Hong Kong are also referred as "Dim Sum" bonds. RMB bond ETF which mainly invests in Dim Sum bonds to track a Dim Sum bond index is often referred as Dim Sum bond ETF.
RMB Bond ETF can also invest in onshore renminbi bonds to track an onshore renminbi bond index. However, due to mainland China’s capital control, such ETF can only invest in mainland China’s domestic securities market through the RQFII quota of an RQFII granted by mainland authorities, like other RQFII funds. Therefore, this type of RMB bond ETF is often referred as RQFII bond ETF. Learn more about RQFII funds.
What are the main characteristics of Dim Sum bond ETF and RQFII Bond ETF?
Dim Sum bond ETF RQFII bond ETF Underlying investment Bonds issued outside of mainland China Bonds issued within mainland China Investment strategy and replication/ tracking method
- Representative sampling
- No direct investment in the Mainland securities markets
- Invest directly in dim sum bonds that represents underlying index performance
- Representative sampling
- Direct investment in the Mainland securities markets through RQFII investment quota
- Invest directly in onshore renminbi bonds that represent underlying index performance
Trading currency Renminbi and possibly in HK dollar as well (Note) Renminbi and possibly in HK dollar as well (Note)
Note: The manager of RMB bond ETF may choose to adopt the dual counter model to simultaneously offer ETF units in different trading currencies (ie renminbi and HK dollar). You may refer to the “Dual Counter model for ETFs” for the details of the Dual Counter trading model and its key risks respectively.
What are the key differences between holding an RMB bond ETF and holding renminbi bonds?
In general, investors holding renminbi bonds directly will receive regular coupon payments. However, an RMB bond ETF may not make any regular distributions, particularly if the underlying bond index is a total return index. Also, there is no guarantee on the rate or frequency of distribution by RMB bond ETFs. The fund manager of RMB bond ETF has the discretion of paying distributions out of net income, out of capital or effectively out of capital. You should read the relevant offering document (including the key facts statement) of the fund for further details including the risk factors associated with different distribution policies.
In addition, the distribution (if any) yield of an RMB bond ETF may be lower than the yield of the underlying portfolio of renminbi bonds, due to the fees, charges and other expenses of running the RMB bond ETF. You should understand how these fees and charges are charged and calculated, and consider how they may affect your investment return.
You may refer to “proxy of bonds” for more information on bonds and bond funds.
Before buying an RMB bond ETF, are there key risks I need to consider?
Like investment in other ETFs, investing in RMB bond ETFs are subject to risks such as market risk, passive investment risk, tracking error risk, risk relating to trading at discount or premium to NAV, liquidity risk, tax and other risks.
RQFII bond ETF
If you want to invest in an RQFII bond ETF, it is important for you to consider the following key risks:
- risks involved in RQFII funds; and
- risks concerning RQFII funds that invest substantially in renminbi bonds or other debt instruments issued in mainland China.
Dim Sum bond ETF
If you want to invest in a Dim Sum bond ETF, it is important for you to consider the following key risks:
- risks of investing in renminbi bonds;
- offshore renminbi bond market risk
Although the offshore renminbi bond market is growing quickly, it is still a relatively young market. The quantity of offshore renminbi bonds issued or distributed outside the mainland China is currently limited. The market may be more volatile than a developed bond market. Secondary market liquidity of offshore renminbi bonds may also be limited.
- risks relating to lower rated bonds and unrated bonds
Dim Sum bond ETFs may track indices which include lower rated bonds and unrated bonds. Issuers of lower rated bonds or unrated bonds may have a higher risk of default. This may adversely affect the net asset value of the Dim Sum bond ETF and result in losses to investors.
You should read carefully the offering document including the product key facts statement to fully understand the nature, investment objective and strategy, key features, major risks and dividend policy of an RMB bond ETF.
You should assess whether the product is suitable for you in light of your investment objectives, the amount of investment required and your risk appetite. Should you have any questions about the product, please consult your intermediaries before making any investment.
I understand that Hong Kong Exchanges and Clearing Limited has launched the Renminbi Equity Trading Support Facility (TSF) to enable investors who have insufficient renminbi to buy renminbi-traded shares. Can I use this facility to buy RMB bond ETF?
Currently, the TSF only supports secondary trading of renminbi-traded shares, ETFs with equities as underlying and real estate investment trusts (REITs). Therefore, you cannot use the facility to buy RMB bond ETF. For details about this arrangement and the list of securities supported by the TSF, please refer to Hong Kong Exchanges and Clearing Limited's website.