Spotlight: The Market Vectors China ETF In Focus (PEK)

David Fry:  The Market Vectors China ETF (NYSE:PEK) follows the CSI 300 Index which consists of 300 A share stocks listed on Shanghai or Shenzen Stock Exchange. The ETF is rather new being launched less than one year ago in October 2010. The fund expense ratio is .72%. The holdings for the fund consist of swaps which from time to time may include cash positions when counterparties are unavailable. This plus risks associated with possibilities that counterparties might fail to meet their obligations are considerations for investors in addition to the volatility and performance of the CSI 300 Index itself.

We’ve been following the CSI 300 for quite some time in advance of this ETF being issued and are glad to see it available. It best features the investment climate within China itself beyond most China-related ETFs popular and widely followed.

A more critical issue is the 13.87% premium PEK is currently trading at over the index. This large premium has been at around this level (low of near 9% to a high of near 20%) since issuance. For ETF investors, this may be off-putting since wide swings lead to tracking inefficiencies.

THE MISSING LINK

The primary reason for the premium is Van Eck does not have a QFII (Qualified Foreign Institutional Investor) license permitting them to deal in buying A shares. Until they receive this license they must go through an intermediary with that license (in this case Credit Suisse Securities (Europe) to gain exposure to the index.

It’s an intriguing and important issue. Van Eck was smart to cover this index before competitors. It may be most investors will be content to wait for QFII license to be issued. In the meantime time investors should their eyes on this issue. Over the long term an issue like PEK may be the most direct way to invest in growing Chinese markets.

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