Just a quick reminder that tomorrow I’ll be at ETF Stream’s Big Call: ESG Investors Forum 2021. I’ll be moderating two panels on my favourite subject of ESG as a factor and using ETF within portfolio construction.

You can sign up HERE.  You can attend in person – in the City – or virtually. Kick off around 9am.

China Bond ETFs

Chinese fixed income seems to be growing in popularity. That sounds rather odd when one considers the plight of Evergrande but in reality, what’s happening in the corporate sphere is very different from the world of sovereign bonds. I’ve argued before that if you are looking for a useful diversifier within the fixed income spectrum, Chinese sovereigns might be a useful bet. Whilst I have no doubt that the CCP is perfectly willing for private investors to be shortchanged by local corporates, I also think that they’ll be very reluctant to screw foreign fixed-income investors in their government bonds. As communists go, the Chinese seem fairly reliable at the sovereign level – assuming of course they don’t become a pariah state and invade Taiwan.

Interest in Chinese sovereigns certainly seems to be on the increase in ETF land. State Street for instance has recently launched a Chinese government bond ETF, ticker CHGT with a low total expense ratio of 0.19%. The attractions are obvious – you actually get a decent yield. In the case of the State Street product, the yield to maturity is 2.82%.

This new ETF is up against fierce competition, with the main competitor iShares and its iShares China CNY Government Bond UCITS ETF (CGBI) . iShares also boasts iShares China CNY Bond UCITS ETF (CNYB), which according to ETF Stream “has been one of the firms most successful launches over the past few years, gathering $12.7bn in AUM since coming to market in July 2019.” CNYB is up 7.5% om 2020, with YTD returns of 6% – its weighted average yield to maturity is just under 3%.

The table below lists the main competitors in this fast-growing space.

Inflation Linked ETFs

Nicholas Rabener at FactorResearch has another excellent paper out– this time looking at inflation-themed ETFs.  The chart below maps out returns which seem to show a very wide dispersion in returns.

According to Rabener, the heterogeneous performance is explained by different strategies that result in differentiated portfolios.

• “CPI is largely a play on short-term US government bonds with a dash of commodities (oil), currencies (JPY), gold, and equities.
• RINF is a completely different animal and allocates to TIPS while shorting US Treasuries, in order to isolate inflation expectations.
• RLY invests primarily into equities (energy, real estate, materials), but also commodities and TIPS.
• RAAX has a similar asset allocation to RLY, but excludes TIPs, and has exposure to gold (directly and via gold miners) and even has a minor Bitcoin allocation.
• INFL focuses almost exclusively on stocks, specifically on companies they believe are inflation beneficiaries like stock exchanges, energy, and material companies.

The next chart below maps out what’s under the bonnet of these five very different inflation-themed ETFs. The Horizon Kinetics ETF seems to be jam packed full of equities while the IG Real return ETF is basically a bonds vehicle (and has produced the worst returns of the five).