Hong Kong ETF market remains vibrant despite market conditions

16 July 2014   Category: News, Asia, Global, Hong Kong   By Hui Ching-hoo

Given that Asia Pacific (ex-Japan) has become the second-fastest growing ETF market in terms of number of products and AUM, an increasing number of local and foreign sponsors are looking to extend their turf in the regional ETF hub, Hong Kong.

Despite capital inflows into RQFII ETFs in the territory having tapered off due to unfavourable market conditions, ETF players are striving to offer customised solutions in order to quench the growing short-term investment appetite from local investors. 

The Asia Pacific market’s dynamism is underlined by figures from Deutsche Bank, which point out that for regional exchange traded products (ETPs), including Japan, total AUM amounted to $183 billion as of June 20, an increase of 8.2%, or $13.9 billion, compared to the close of last year. Average year-to-date weekly flows stood at $602 million. 

According to Douglas M Yones, head of ETFs, Asia, Vanguard Investments, Hong Kong is the one of the most buoyant markets in the region: “The number of ETFs listed in the territory and their AUMs have been doubling every year,” he says. 

Up to June 20, there were a total of 82 ETFs with 137 listings in the territory, with total AUM of $34.27 billion, accounting for an 18.7% market share in the Asia Pacific region, according to the Deutsche Bank report. 

Mr. Yones notes that investors in Asia are very tactical in nature, and tend to take advantage of short-term market trends. As such, they prefer to use the satellite approach in their portfolios. “We’ve seen that some investors structure ETF funds as the targeted exposure, with the ability to determine which assets they tend to be overweighting or underweighting,” he points out. 

To take advantage of this, Vanguard launched three new ETFs in Hong Kong in June: the Vanguard FTSE Japan Index ETF, the Vanguard FTSE Developed Europe Index ETF, and the Vanguard FTSE Asia ex-Japan High Dividend Yield Index ETF. Mr. Yones says the funds enable local investors to more effectively raise additional overseas exposure based on their short-term investment beliefs. 

Another ETF strategy commonly adopted by foreign investors is building a core portfolio in a manner which is entirely driven by passive investment. Mr. Yones says that this approach can reduce the cost of investing: “It is very impactful in Asia, as investors can reduce the overall cost of their core portfolio and choose their targeted, short-term asset allocation through ETF satellite or active satellite strategies.” 

Tobias Bland, chief executive officer of Hong Kong-based asset management firm Enhanced Investment Products (EIP), tells ETFI Asia that the Hong Kong ETF market continues to increase in AUM at a strong pace; growing on average about 35% per year from 2005 to February 2014. 

“Most of the ETF turnover still resides in only a handful of products. New ETF listings to date have been fairly muted,” he explains. “The second half will hopefully bring new developments in increasing the breadth of ETF products and new access channels like the China/Hong Kong “through train”, which will broaden the Hong Kong market investor base into mainland China.”

Despite the imminent implementation of a mutual recognition scheme between Hong Kong and China, A-share related RQFII ETFs have not yet benefited from any renewed impetus. The depreciating RMB and slowing Mainland economic growth appear to have taken a toll on their performance. 

Figures from fund consultancy Morningstar show that Hong Kong-domiciled RQFII ETFs saw capital outflow of 14%, or five billion RMB ($800 million) in March. By comparison, the Hong Kong-dollar-denominated iShares FTSE A50 China ETF recorded capital inflow of 1.7%. 

Mr. Bland, however, still remains positive on the outlook of the ETF market: “As the ETF market matures in Hong Kong, it will be important for investors to have more product breadth beyond China-related ETFs. This has been part of the evolution of ETFs in other established markets like the US and Europe, and hopefully this will happen in Hong Kong as well.”

Having launched seven ETFs tracking the local indices of seven emerging Asian countries, Mr. Bland identified the following factors that the firm will take into account when launching new ETF products: 

• Identifying competitive edge – lower fees, better distribution, education, ability to access and structure an ETF in a more efficient way;

  • Current ETF landscape, similar ETFs already available;

  • Demand from institutional and advised or individual investors;

  • Distribution channels within the banking, broker, IFA channels; 

  • Investor education requirements;

  • Product specific: low cost, liquidity, tax efficient;

  • Regulatory: assess the hurdles to get products approved by regulators.