Bonds Sep 27

New-style ETFs stir pre-holiday excitement

Longer durations, lower management fees and greater price flexibility means bond fund provides new ‘quilted jacket’ for investors before the onset of Golden Week 

New-style ETFs stir pre-holiday excitement
New fund tracks Shanghai Stock Exchange index.

(ATF) China’s A-share market volatility has has intensified going into the third quarter, and the wait-and-see sentiment of funds on the market has quietly increased. 

Stockholders who hold currency and are waiting for the right time to trade in order not to let the funds "run into accounts", usually buy currency ETFs and other on-site wealth-management products. 

According to finance site jrj.com the saying among these investors goes: "No matter how small a mosquito is, it is meat." 

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Compared with stock investment, on-market wealth-management products have lower returns, but with their "T+0" flexible advantages in on-market trading, coupled with occasional arbitrage opportunities, they can be regarded as the "intimate little quilted jacket" for stock investors, the site wrote.

Last week, however, the on-market financial management camp ushered in an "upgraded" product, a short-term ETF. In addition to the advantages of cash redemption and seamless stock trading, compared with existing currency ETFs, the short-term ETFs have lower management fees, longer underlying asset durations and greater price flexibility.

The ETF was listed on the Shanghai Stock Exchange on September 25, just before China’s October “Golden Week’ holiday. Capital markets are generally more volatile before holidays and arbitrage opportunities increase significantly.

From the product design point of view jrj.com said the fund has many innovations; it is a bond ETF with full cash redemption, it’s the only bond ETF that uses interbank debt as its investment target and the only such ETF that is benchmarked against currency ETFs.

The fundamental reason for these innovative designs is to increase the income of on-market financial management while controlling risks as much as possible to facilitate the transactions of stock investors, especially those looking to wear a so-called quilted safety vest, the report said.

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The full name of the ETF is Haifutong CSI Short-term Trading Open Index Securities Investment Fund, and it tracks the CSI Short-Term Index. Historically, the average duration of currency fund portfolios is controlled at about 90 days, while the remaining maturity of the investment target of the CSI Short-Financial Index is about 120 days. The duration is longer, which also determines the level of return and volatility, which is slightly higher than monetary funds.

According to Wind data, the management and custody fees are lower than the currency ETF. Taking into account that after listing, brokerage agencies generally implement transaction commission discounts, the comprehensive fee rate of short-term ETFs will be significantly lower.

The liquidity of the new fund may be significantly enlarged in the short term after it is listed, which will increase the volatility of the market price and further increase the arbitrage opportunities for investors, according to jrg.com.