Felix Xu

a city skyline at night

More thematic, fixed income, and smart-beta passive products are expected to go online in Hong Kong this year as local ETF managers are seeking to diversify their product suite to differentiate themselves from rivals, and tap into institutional investors' stronger appetite on these products.

In 2018, there were 15 ETFs launched from eight ETF issuers in the city, against three new listings from two issuers in the previous year, according to figures from US financial service provider Brown Brothers Harriman (BBH).

Chris Pigott, head of Hong Kong ETF Services at BBH, points out the key theme for the Hong Kong ETF market in 2018 was moving away from broad-based core products to more innovative strategies.

Six of the new ETFs issued last year were sector or thematic products tracking China's new economies as investors are more eager to capitalise on the country's fast growing financial technologies and internet sectors.

For example, the CICC KraneShares CSI China Internet ETF launched in April 2018 and the Samsung CSI China Dragon Internet ETF listed last June are designed to track Chinese large-cap internet and e-commerce companies listed in Hong Kong, China, and the US including Tencent Holdings, Baidu Inc., and Alibaba Group Holdings.

Meanwhile, smart-beta ETFs are becoming another focal point in the market. Five smart-beta products have been launched on the Hong Kong exchange since Hong Kong-based Premia Partners rolled out the city's first smart-beta products, the Caixin China Bedrock Economy ETF and the Premia CSI Caixin China New Economy ETF, in October 2017.

According to CK Chai, head of capital markets and chief investment officer of Ping An of China Asset Management (Hong Kong) (PAAMC Hong Kong), smart-beta investing have become a "global phenomenon" especially as more cost conscious institutional investors are seeking performance enhancement over their benchmarks through smart-beta ETFs.

Figures from fund consultant Morningstar show that assets of global smart-beta ETFs and exchange-traded products reached US$999 billion as of December 2017 from US$280 billion five years ago.

PAMAC Hong Kong, the Hong Kong-based investment arm of Mainland insurance giant Ping An Insurance Group, launched four innovative ETFs, including the city's first smart-beta multi-factor ETF and artificial intelligence ETF, late 2018.

The company is planning to launch four new thematic and smart-beta funds this year. Mr. Chai says the company will continue to focus on innovative ETFs products rather than launch plain vanilla products as "systematic, quantitative and scientific" smart-beta strategies is the company's core strength.

PAMMAC Hong Kong's market positioning reflects that product specialisation and differentiation are increasingly important for smaller-sized ETF managers to maintain their competitiveness especially as broad-based ETF market has been dominated by the flagship ETFs from international players such as BlackRock and State Street Global Advisors ETFs.

Mr. Pigott expects fixed income ETFs will be another area issuers focus on for product development in Hong Kong given the market has an underrepresentation of fixed income products.

Currently, there are only nine fixed income ETFs listed in Hong Kong. Two of which were launched in 2018 - the CICC Bloomberg Barclays China Treasury 1-10 Years ETF and ChinaAMC Bloomberg Barclays China Treasury + Policy Bank Bond Index ETF.

The Hong Kong ETF market will see an increasing number of new listing as ongoing regulatory developments will bring new ETF issuers to the market, according to Mr. Pigott.

One of the major regulatory developments is that the Securities & Futures Commission, the city's financial regulator, completed market consultations on amendments to the unit trust code late last year, which covers innovative products including actively managed ETF and unlisted shares ETF.

Details of the product guidelines are expected to be issued later this year. Local ETF managers like Value Partners Group is keeping a close eye on the market.

There were 129 ETFs and inverse & leveraged products listed in Hong Kong with total market capitalisation of HK$311.48 billion (US$39.9 billion) as the end of 2018, according to figures from the Hong Kong stock exchange.


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