Landmark RQFII ETF to list in New York

DBX Advisors, part of Deutsche Asset & Wealth Management, and Hong Kong-based Harvest Global Investments are set to launch the first offshore RQFII exchange-traded fund in New York this week, AsianInvestor understands. And other similar products are said to be in the pipeline.

The db X-trackers Harvest China Fund, which will track the benchmark CSI 300 stock index, is expected to list on Wednesday (November 6) on the New York Stock Exchange, say sources.

This is a new ETF model, which allows for non-renminbi qualified foreign institutional investor holders to manage RQFII products and represents a breakthrough for international fund managers seeking to exploit the RQFII programme.

“The approval [of this ETF] hints that we can now simply partner with a European fund manager to launch our products in overseas markets,” one Hong Kong RQFII fund manager tells AsianInvestor, noting that this provides an attractive option for gaining access to Europe. “Setting up an office in London is too expensive.”

Harvest Global acts as the sub-adviser and is responsible for obtaining RQFII quota and investing in China A-shares on the Shanghai and Shenzhen exchanges. DBX Advisors has overall responsibility for the management and administration of Harvest Global.

(Harvest Global is the international arm of Beijing-based Harvest Fund Management, which in turn is 30% owned by DeAWM.)

Under this arrangement, DBX Advisors, which does not have an RQFII licence, is effectively running an RQFII ETF.

Harvest Global’s Andy Yang and Sun Xiaodong are portfolio managers for the ETF, according to an October 4 filing with the US’s Securities and Exchange Commission (SEC).

Harvest Global received Rmb2 billion ($328 million) in RQFII quota on September 26, with sources suggesting it will be used to launch the ETF.

As for other such products, Bosera Asset Management’s Hong Kong arm and US fund manager Krane Funds Advisors on September 10 filed a preliminary prospectus for an ETF called KraneShares Bosera MSCI China A Share ETF with the SEC.

Similar to the DBX and Harvest set-up, Krane will act as the investment manager and co-adviser, while Bosera Asset Management (International) will be co-adviser, responsible for the day-to-day management of the fund. Bosera’s Jean Kong will act as the lead portfolio manager.

But it may not be all smooth sailing. Some argue that Chinese regulators may not be so comfortable letting non-RQFII holders indirectly access onshore markets via such ‘sub-adviser’ models – especially in situations such as this, where Chinese authorities are not so familiar with the markets in question.

Still, industry players see the DBX/Harvest launch is a “smart move”, says Stewart Aldcroft, senior adviser in Citi’s investor services division in Hong Kong. “The industry has been talking about this model.”

However, this approach may not be easily replicable by other fund managers, he adds, noting that Harvest and DBX “have a very unique relationship”.

The DBX/Harvest ETF has management fees of 0.8% with the total annual fund operating expenses after fee waivers estimated to be 1.1%. This is at the high end compared to the eight existing RQFII ETFs listed in Hong Kong Stock Exchange, which have expense ratios ranging from 0.79% to 1.15%.

The sub-adviser, Harvest Global, will use a full replication indexing strategy to track the underlying index. The fund will invest at least 80% of its net assets in Chinese securities.