RMB vs DSUM: Comparing the New Dim Sum Bond ETFs

September 28, 2011 by  
Filed under Commentary, ETF IPOs (New ETFs)

Note:  The original article contained facts and opinions based on asset data from the Guggenheim website dated 9/27/11.  That data was in error, and this article was subsequently revised to reflect updated asset information dated 9/28/11.

Last week Guggenheim and PowerShares both gave U.S. investors access to the Chinese Yuan denominated bond market (also known as the Dim Sum bond market) with new ETF offerings.  Guggenheim Yuan Bond ETF (RMB) launched on September 22, while PowerShares Chinese Yuan Dim Sum Bond Portfolio (DSUM) came out the following day.

Both products track indexes of Chinese yuan-denominated bonds eligible for investment by U.S. and other foreign investors.  Such bonds can be issued by either Chinese or non-Chinese companies.  The secondary market in which they trade is commonly referred to as the “Dim Sum” bond market.  Securities traded in mainland China are not included.

RMB sticks to investment grade offerings while DSUM also includes high yield and non-rated paper.  Not surprisingly, DSUM has a substantially higher yield.  The following table highlights the major differences of the two funds:

CharacteristicRMBDSUM
IssuerGuggenheimPowerShares
Index ProviderAlphaSharesCitigroup
WeightingModified Mkt ValueMarket Cap
QualityInvestment GradeIG & HY
Maturities1-5 yrs1-10 yrs
Expense Ratio0.65%0.45%
Index Yield1.56%2.90%
Estimated ETF Yield0.9%2.4%
Adj. Modified Duration2.33.1
DistributionsMonthlyMonthly
Index Holdings3745
Fund Holdings3721
Portfolio ConstructionReplicationSampling
Creation/RedemptionCash & In-kindCash & In-kind

The Dim Sum bond market is growing rapidly.  The number of securities eligible for the underlying indexes should increase accordingly.  In such a rapidly-evolving market, fund characteristics could change dramatically over time.

Both new products allow for share creation and redemption in cash as well as the more traditional in-kind exchange.  Presumably, this is because many of the Authorized Participants do not have efficient access to all of the underlying securities.  Since the funds themselves will be responsible for buying and selling the individual bonds, the likely result is lower tax efficiency and higher tracking error.

The RMB website just happened to illustrate this.  The fund holdings (dated 9/28/11) show that more than 12% of assets are cash (renminbi/yuan).  RMB apparently had a recent inflow, and performance may be subdued until the cash is invested.

Guggenheim Yuan Bond ETF (RMB) launched 9/22/11 and seeks to track the AlphaShares Yuan Bond Index minus a 0.65% expense ratio.  Additional information: summary, fact sheet(pdf), press release(pdf), prospectus(pdf), Investor Guide(pdf), and the underlying index.

PowerShares Chinese Yuan Dim Sum Bond Portfolio (DSUM) launched 9/23/11 and seeks to track the Citigroup Dim Sum (Offshore CNY) Bond Index minus a 0.45% expense ratio.  Additional information: overview, press release(pdf), prospectus(pdf), and the Investment Case(pdf).

Opinion/Recommendation: Investors desiring exposure to the Dim Sum market would appear to be better served by DSUM, the PowerShares offering.  Its total market approach results in a yield more than twice that of RMB, while increasing duration less than one year and doing so for a lower fee. 

Disclosure covering writer, editor, and publisher:  No positions in any of the securities mentioned.  No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

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