Hong Kong's equity ETFs have drawn massive flows from the market over the past few years with the low rate and favourable market environment, but now local ETF managers are seeking to develop short-term deposit related products to capitalise on the upward interest cycle.
CSOP Asset Management, the Hong Kong subsidiary of Shenzhen-based China Southern Asset Management, has recently launched the city's first ETF that invests in Hong Kong dollar (HKD)-denominated money market funds (MMFs).
The ETF, which was launched on the Hong Kong Stock Exchange in July 18, is benchmarked against the 3-month Hong Kong Dollar Interest Settlement Rate. The fund mainly invests in HKD denominated short-term deposits.
The fund raised about US$100 million initial investments from various institutional investors including banks and insurance companies, says Melody He, managing director and head of sales and product strategy at CSOP.
It is one of the largest size of ETF fundraisings in recent years with local institutional investors increasingly seeking investment tools with high liquidity and stable return for their cash management.
Hong Kong currently has 45 registered MMFs with AUM of HK$137.9 billion, but the funds were previously not the favour for yield seeking investors.
The yield of most of the funds are relatively low compared to the interest of time deposit offered by local commercial banks, ranging from 0% to 0.5%.
As such, the ETF will invest 75% of its assets in "relatively longer" duration deposits of up to three months, and the rest in deposits of up to one week, so as to deliver "attractive" yield, says Louis Lu, a portfolio manager of CSOP Asset Management.
The net return of the ETF is expected to be about 1.5% per annum, which is relatively low compared to other CSOP ETFs including its flagship CSOP FTSE China A50 ETF. However, Mr. Lu anticipates the continuing upward trend of interest rate is supportive for the enhancement of the ETF's return going forward.
The 3-month Hong Kong Interbank Offered Rate (HIBOR) has raised from 1% to over 2% in the second quarter of 2018, a level only seen in 2008 over the past decade, Mr. Lu points out.
The ETF launch marks the change that local ETF providers are stepping up to diversify their product mix away from Mainland and Hong Kong equities tracking products.
Recently, more local ETF managers have launched fixed income ETFs tracking various credits including Mainland government treasuries.
That said, currency risk appears to be one of the major concerns for investors particularly as RMB has depreciated significantly against US dollar thus far this year. They might tend to look at the fixed income ETFs denominated in HKD or US dollar.
China's MMF marketThe MMF market has been thriving in China with the prevalence of e-commerce and digital payment.
According to Mainland financial data provider Wind Co., there were 26 MMF ETFs listed in China as of April with total trading units of 165 billion, up from 154.5 billion at the end of 2017.
Tianhong Asset Management, a 51%-owned subsidiary of Alibaba Group's (Alibaba) financial arm Ant Financial, launched the country's first internet MMF, Yu'e Bao, in 2013. Yu'e Bao's linkage with Alibaba's online payment platform has given a big boost to the MMF market.
Figures from Asset Management Association of China show that the country's MMFs had about 732 billion RMB in net asset value at the end of March, equivalent to almost 60% NAV of the whole mutual fund industry.
By comparison, Hong Kong's MMF market is still at its infancy. However, Ms He notes that CSOP will push ahead with its development. The company is negotiating with brokers to lower the trading fees for its ETF in order to attract more investors into the market.
The company is planning to further diversify its ETF product mix to develop thematic ETFs and RMB and US-denominated MMF ETF, she adds.
CSOP is one of the largest Mainland ETF providers in Hong Kong, which currently has 11 ETF products including the newly launched MMF ETF.