Industry Updates

The rise and rise of Hong Kong's ETF market

Felix Xu

a city at night

Rising markets and widening recognition of fixed income ETFs drives new money into Hong Kong's ETF, writes Felix Xu.

Hong Kong's ETF market will continue its growth momentum this year with local themed products remaining the market focus, local ETF managers expect.

The city's ETF market recorded gains in assets the last four months of 2017 primarily driven by the rally of Hong Kong stock market.

Figures from the Hong Kong Stock Exchange show that the market cap for Hong Kong-listed ETFs and leveraged and inverse (L&I) products expanded from HK$342 billion (US$43.71 billion) in September to HK$361 billion in December, or up 18% year-on-year from HK$306 billion in December 2016.

The ETF market's average daily turnover was up by 14.6% last year to reach around HK$361 million at the end of December, led by the largest broad equity index ETFs such as the Tracker Fund of Hong Kong and the CSOP FTSE China A50 ETF.

Joanne Siu, ETF sales director of Samsung Asset Management (Hong Kong), notes that investors experienced bull market returns in 2017 with new daily highs of multiple broad-based market indexes throughout the year.

As such, ETFs provide an important tool for growth stock-seeking investors to diversify their portfolio. The products also help them to spare their effort on a tedious stock-picking process, she says.

Melody He, executive director and head of development ETF and index solutions at CSOP Asset Management, believes that the ETF market growth is likely to carry through into 2018 amid the ongoing bullish run of the stock market.

"Top broad-based equity ETFs including the Tracker Fund of Hong Kong and the Hang Seng H-Share Index were the major contributors for the growth last year. We've seen significant capital inflows into these ETFs as most of the Hong Kong equity benchmark indexes were up by 20%-40% last year," Ms. He notes.

She predicts that plain vanilla ETFs will continue to be the major driver of growth.

Ms. Siu expects more local and regionally themed ETFs will benefit from the upcoming ETF Connect programme this year, which offers a chance for Hong Kong ETF providers to distribute their products directly to retail investors in China.

Another market trend is that Hong Kong ETF providers are putting more emphasis on fixed income products, which have become increasingly popular in Europe and the US. There were seven bond ETFs listed in Hong Kong last year including the Ping An of China CSI 5-10 year CGB ETF.

But Ms. He believes fixed income ETFs are unlikely to gain much traction in Hong Kong in the short term.

"Fixed income ETF is still a relatively new concept in Hong Kong. Many investors prefer to trade fixed income in OTC [over-the-counter] markets rather than invest in [fixed income ETFs]. It takes time for them to gain familiarity with the products," she says.

Ms. Siu echoes the view, noting that the fixed income ETFs are small relative to the wider fixed income and credit index markets.

"Given the limitations of bond liquidity, fixed income products are unlikely to exceed equity ETFs in the meant time," she says.

Apart from fixed income ETFs, Ms. Siu expects that more new innovative products will come to the market this year such as actively managed ETF, commodities or sector L&I products, and socially responsible investing ETFs.

Institutional investors are increasingly recognising the benefits of bond and smart beta ETFs. Active investors diversify their portfolios of individual issues with bond ETFs in order to quickly capitalise on investment opportunities, Ms. Siu notes.

According to Ms. He, more ETF providers are looking to launch smart beta products to accommodate growing demand from local investors with a home market bias, in order to gain exposure to the Greater China market.

There were 133 ETFs and L&I products listed on the HKEX as at end-2017.

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