Vanguard Emerging Markets ETF first to offer China A-Shares

Vanguard | 03 June 2015


Vanguard Australia today announced that it is broadening the diversification in the Vanguard FTSE Emerging Markets Shares ETF (ASX: VGE) which will make it the first exchange-traded fund on the Australian market to offer exposure to China A-shares.

The fund will move from the FTSE Emerging Index, containing large and mid-cap securities, to the broader FTSE Emerging Markets All Cap China A Inclusion Index*, which also includes China A-shares and small-cap securities.

This aligns with the index change to the US-listed Vanguard FTSE Emerging Markets ETF (NYSE: VWO) the world's largest emerging markets ETF**, into which VGE invests. "This change in benchmark will provide investors with broader diversification and offer more comprehensive exposure to emerging markets shares," said Vanguard's Head of Investments Asia-Pacific, Rodney Comegys.

The addition of China A-shares to the Vanguard Emerging Markets Stock Index Fund was made possible by the China Securities and Regulatory Commission (CSRC) and State Administration of Foreign Exchange (SAFE). In recent months the CSRC granted Vanguard, through Vanguard Investments Australia, a Renminbi Qualified Foreign Institutional Investor (RQFII) licence and SAFE approved a quota to invest***.

"Australia is one of Vanguard's three global investment centres for portfolio management and trading, and we are proud to have been the first Australian fund management company granted a RQFII licence," said Mr Comegys.

"We have received a preliminary quota of RMB 10 billion, the largest initial quota ever granted, allowing us to offer Vanguard clients more diversified portfolios that includes access to this key market and aligns with our investment philosophy."

China A-shares exposure
With the world's second-largest GDP, China accounts for 20% of global trade and 7% of global consumption****. The new benchmark for the Vanguard FTSE Emerging Markets Shares ETF includes China A-shares at around a 5.6% weighting.

Through the addition of China A-shares to the US-listed VWO, investors in the Australian ETF VGE, will gain more complete exposure to a key emerging economy and the second-largest share market in the world by market cap.

"As the first major emerging markets fund to add exposure to China A-shares, the fund will benefit investors with more diversification, deeper emerging markets exposure, and greater access to the growth potential of Chinese equities," said Vanguard CEO Bill McNabb.

All-cap exposure

Adding small-cap exposures to VGE also adds diversification benefits and moves investors closer to complete market-cap weightings. Under the new benchmark, small-cap securities will account for approximately 11.1% of the fund.

"The best proxy for a market is one that provides the most complete and comprehensive coverage, which is why we believe these moves are in the best interests of investors over the long term," said Mr. McNabb.

Additional transition details
VGE is currently the lowest cost emerging market ETF on the Australian market and its management cost of 0.48% per annum will not be affected by this change.
The benchmark change will be staggered over several months in order to ensure an orderly and cost effective transition.

Vanguard does not expect the transition to result in additional capital gains distributions to VWO's investors, including VGE.

The transitions will require turnover of holdings, resulting in a temporary and modest increase in transaction costs. Vanguard Equity Investment Group, adviser to the funds, will seek to minimise any impact through the use of efficient portfolio trading and other expert strategies developed over many years and used during the periodic rebalancing of indexes.

* The FTSE Emerging Markets All Cap China A Inclusion Index comprises large, mid and small cap securities of the FTSE Emerging All Cap Index and FTSE China A All Cap Index. The weight of the FTSE China A All Cap Index in the FTSE Emerging Markets All Cap China A Inclusion Transition Index will be adjusted by the quota available to international investors.

**Source: Strategic Insight, as at 30 April 2015.

***China A-shares quota obtained by Vanguard Investments Australia Ltd through a Renminbi Qualified Foreign Institutional Investor (RQFII) licence.

****Sources: World Bank, International Monetary Fund, and World Trade Organization.

All asset figures are as at 30 April 2015, except where noted.

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