• Money market ETFs are popular among Hong Kong investors
  • Their popularity owes partly to Hong Kong being a regional hub for US dollars, but also to the interest rate cycle
  • With this in mind, Hong Kongese ETF providers are pivoting to money market ETFs
Hong Kong-based CSOP Asset Management Limited (CSOP), the international arm of Shenzhen-headquartered China Southern Asset Management, is repositioning its ETF strategies to put more emphasis on money market and leveraged and inverse (L&I) products this year as market sentiment has become more defensive and risk averse.

The Mainland manager rolled out the second money market ETF in Hong Kong on January 25 in order to capture the city's growing US dollar cash deposits, as well as the trend that local investors tend to park their money in relatively safe assets.

The CSOP US Dollar Money Market ETF, which is benchmarked against the FTSE three-Month US Dollar Eurodeposit Index, tracks dollar-denominated short-term deposits and money market products.

The fund launch comes six months after CSOP launched the first money market ETF. The CSOP HK Dollar Money Market ETF, which was listed in July 2018, has been well-received with a growth of 251% since its inception to as much as HK$3.28 billion in total AUM.

According to Melody He, managing director and head of sales products strategy of CSOP, the company derives its money market ETFs as the new fund can cover regional investors such as high net worth individual, insurers, and endowment funds, which hold a lot of dollar-denominated assets in the city.

Ms. He explains that the Hong Kong dollar and US dollar money market products are looking more attractive investors under the current US rising interest rate cycle, and Hong Kong, as a major US dollar offshore hub with more than over 37% of the city's overall HK$4.7 trillion (US$6.02 billion) cash deposits US-denominated, will provide strong liquidities for the products.

CSOP delved into Hong Kong's ETF market in 2012 with the launch of its flagship CSOP FTSE A50 ETF. The ETF, which tracks A-shares large cap, has long been one of the top ten most actively traded ETFs on the Hong Kong Stock Exchange as international investors in the city are increasingly eager to gain exposure to China's onshore equities.

Including the newly launched US dollar money market ETF, CSOP currently has 14 ETFs and L&I products. CSOP is one of a handful of Mainland fund managers in Hong Kong with a comprehensive mix of ETF product suite, running the gamut from A-share equities tracked to ultra short-term bond focused.

However, when the impact of the trade war between the US and China kicked in, China's A-shares market nosedived as much as 24% through 2018. The increasingly volatile market condition had led CSOP to shift the focus of its ETF product strategies from large cap and major benchmark constituent oriented to low risk and risk hedging focused.

One of the major initiatives is to further diversify its money market ETF line-up. CSOP will launch ETFs that tracks other currencies denominated money market products, according to Ms. He.

Money market funds will be more attractive with the US rate hike as their liquidities and returns are better than bank deposits, she adds.

In terms of alternative products, CSOP have launched a total of six L&I products after the Securities & Futures Commission, the financial regulator in Hong Kong, gave the go-ahead for these speculative tools in 2016.

But CSOP delisted two of its L&I products, the CSOP Nifty 50 Daily (2x) Leveraged Product and the CSOP Nifty 50 Daily (-1x) Inverse Product, in July 2017, because of lukewarm market response as investors are not familiar with the new products at that time.

However, L&I products has drawn more market traction recently as investors are seeking risk hedging tools for increasing market volatility.

Ms. He says CSOP is planning to develop more L&I products going forward in view of the increasing market volatility.

CSOP had approximately $5.6 billion of total AUM as the end of 2018.

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Photo: Melody He, Source: CSOP