Asian bonds a gamble for iShares

Hongkongers like bonds, yuan and exchange-traded funds. So iShares had the brilliant idea of combining all three, creating Hong Kong's first offshore yuan-denominated bond ETF.

The fund iShares RMB Bond Index ETF will start trading in Hong Kong tomorrow.

Jane Leung, head of iShares Asia Pacific, says the fund targets those holding yuan, who are looking for extra yield on their bank deposits.

The fund aims to replicate the performance of the Citi RMB Bond Capped Index, which was yielding 3.2 per cent as of April 30, says Leung. The fund involves an expense ratio (which measures all costs and expenses of a fund) of 0.39 per cent - low by industry standards.

It's a great concept, but there is a reason why no one has done this before. It's tough for ETFs to track bonds generally and illiquid Asian bonds in particular.

Of the 111 ETFs that trade in Hong Kong, only two are invested in bonds.

It is relatively easy for ETF providers to track stock indices as the shares underlying these benchmarks are easy to buy and sell, with a minimal spread between the bid and offer price. This means the index providers can continuously fine-tune their portfolio to better track their chosen benchmark.