Oz China Smart Beta

Australia

VanEck Australia lists China new economy smart beta ETF

VanEck’s Australian arm is listing a new smart beta fund that will hunt in China’s A shares bin for ‘growth at reasonable price’ stocks. The VanEck Vectors China New Economy ETF (CNEW) will track an index built by CSI, the biggest Chinese index provider, and MarketGrader, a Florida-based research house.

 

The index starts with the 2,000-plus universe of China A-shares, which are screened for basic liquidity. It then applies its smart beta screen, which eyes companies’ growth, value, profitability, and cash flow, with the objective of identifying “securities that offer the best potential for ‘growth at a reasonable price’”, VanEck said on their website.

 

Companies are then graded, with the top 30 from each of the following four “new economy sectors” included in the index:

  1. Healthcare
  2. Technology
  3. Consumer Discretionary; and
  4. Consumer Staples.

The portfolio is equally weighted with rebalancings taking place twice a year.

Analysis – tax: what’s going on?

China ETFs are a logical choice for Australian investors. Most educated Australians have some familiarity with China: its politics, geography and language. And all Aussie investors understand the importance of Chinese growth for Australia’s economy. There is near universal consensus among Aussie investors that – long term, at least – China is a buy.

 

Yet China ETFs in Australia have been beset with a number of difficulties. The most crucial is tax. Most China ETFs have been domiciled in the US and cross-listed over to the ASX. This means they get their dividends taxed by two separate foreign governments before they even arrive in Australia. The PRC takes 10% of dividends paid out by Chinese companies to foreigners. While the US government takes 15% of the dividends paid by US-domiciled funds to foreigners. Taken together, this means Australians lose 25% of their dividend cheque to foreign governments.

 

These taxes blunt the incentives for value investing and buying the dip. Dividends, as we all know, are a function of value. A large dividend cheque – like a large junk bond coupon – is typically a reward for higher risk. (Safe companies with high dividend yields will pretty quickly find their share prices bumped up and yields correspondingly lowered). But high dividend taxes erode this incentive, which is problematic for China ETFs at present, because China is currently dipping.

 

The great strength of CNEW is it’s Aussie domiciled – meaning Australians will only have to pay Chinese (and Australian) taxes.

 

The other difficulty for China ETFs has been, well, China itself. Donald Trump’s trade war; the 2015 bubble; the unpredictable Communist Party; the fat stash of private debt; empty skyscrapers and malls; white elephant infrastructure projects; the list goes on.

 

The geopolitical risks have very probably been overstated. (Most major Chinese companies make 90% of their revenue on the home market. We feel China has been oversold). Yet the perceptions remain.

 

It will be interesting to see if the ‘New Economy’ smart beta twist VanEck is putting on this index can lure in investors in these difficult times.

 

USA

RealityShares lists some kind of multifactor ETF…?

Thematic ETF specialist Reality Shares is listing a big data and quant-driven ETF, in partnership with Fundstrat, a research house specialising in cyptocurrency. The Reality Shares Fundstrat DQM Long ETF (DQML) will track a proprietary index built by Fundstrat with a long name: the Fundstrat Doctor Quant Model Large Cap Equal Weighted Long Index

 

The index methodology is not made publicly available at this point in time. The prospectus says on that the product uses a factor screen on the 500 biggest US large caps, without saying what they are. The index ix then equally weighted and rebalanced quarterly.

 

Analysis

At this stage, we have too little information to run an analysis on the listing. We will reach out to the product issuer and index provider for more information.

 

First Trust lists actively managed municipal bond ETFs

Smart beta specialist First Trust is listing two actively managed muni bond ETFs that offer maturity and duration management. Municipal bonds are bonds issued by local US governments, the income payments of which are federal income tax exempt.

  • First Trust Short Duration Managed Municipal ETF (FSMB)
  • First Trust Enhanced Short Maturity Municipal ETF (FUMB)

FSMB will create a portfolio targeting a weighted average duration of 1–3 years. Duration is a mathematical calculation of the average life of a debt security that serves as a measure of its price risk. In general, each year of duration represents an expected 1% change in the value of a security for every 1% immediate change in interest rates.

 

In picking bonds, First Trust will focus on securities that meet infrastructure needs. FSMB will picks bonds from “at least 13 different states, with an emphasis on states with growing populations and healthy employment trends,” the prospectus says. The fund will primarily invest in investment grade bonds, but may invest up to 35% in junk. The fund can invest in almost every type of municipal

 

FUMB will target a duration of less than one year “and the weighted average maturity of the Fund’s portfolio is expected to be less than three years,” the prospectus says. As with FSMB, this fund will pick bonds from states with strong economies that have been issued, as much as possible, for crucial infrastructure. It will invest at least 80% in investment grade bonds and may invest up to 20% in junk bonds.