This year, 26 ETFs have been delisted in Hong Kong, the whole-year total of 2016, as local ETF providers becoming increasingly active in dropping their illiquid products.

This marks a substantial increase given that only three ETFs were taken off the Hong Kong Stock Exchange (HKEX) in 2015. The trend highlights how Hong Kong's ETF market has become more challenging.

The major problem is that Hong Kong's ETF transaction volume has been declining considerably over the past few years.

According to the figures from the HKEX, average daily turnover for Hong Kong ETFs had dropped to HK$4.7 billion (US$ 601.8 million) in August 2017 from a peak of HK$15.28 billion in April 2015.

The total market capitalisation had been down to HK$353 billion from HK$375 billion over the same period.

The stagnant performance was mainly attributed to the fact that Hong Kong investors are not viewing ETFs as the major component of their portfolio allocation and the market is dominated by China market tracking ETFs.

Compared to other regional markets such as Taiwan and South Korea, Hong Kong retail fund distribution channels are relatively commission-driven, fund intermediaries prefer to pitch their investors to invest in active products instead of ETFs, says Alan Ng, managing director of retail and mass affluent business of Convoy Asset Management Ltd.

"In addition, although the product scope has become more diversified with the availability of commodity ETFs and leveraged and inverse products (L&I products) in recent years, Hong Kong investors still have a strong tendency to wager on China market and Hong Kong market-related ETFs," he adds.

Currently, 59 out of the 129 Hong Kong-listed ETFs (excluding L&I products) are mirroring the performances of China and Hong Kong equities.

With the investor preference, the sizeable broad-based and thematic China ETFs such as Hang Seng China A Industry Top Index ETF ChinaAMC CES China A80 Index ETF are among the best-performing ETFs in Hong Kong this year.

However, the over-concentration has also led non-China ETF providers to realign their product strategies, scrapping their illiquid products.

Many of the delisted ETFs were smaller-sized ETFs because ETF providers are struggling to gain fee incomes because of their low turnovers.

For example, Samsung Asset Management's Hong Kong subsidiary, took off two ETFs tracking HSI Futures and HSI Futures RMB FX and four L&I products in July.

Joanne Siu, ETF sales director of Samsung Hong Kong, previously explained that the company decided to delist the products as it wants to put more emphasis on its flagship Samsung S&P GSCI Crude Oil ER Futures ETF and other L&I products.

"We expect the delisting trend will be ongoing," Mr Ng notes, adding that the Hong Kong ETF market is unlikely to attract new investors in the short term in the absence of a comprehensive product spectrum that helps institutional investors pursue tactical asset allocation.

L&I product is another concern for the market.

Although the Securities & Futures Commission, Hong Kong's regulatory watchdog, gave the green light to ETF providers to launch of L&I products in early 2016, the products have failed to gain local investors attraction as there have been many derivative products with similar functionalities in place, according to Mr Ng.