L&I ETFs seen to gain in traction in Hong Kong

12 April 2017   Category: News, Asia, Hong Kong   By Natalie Leung

Hong Kong fund managers believe the launch of domestic indices tracking leveraged and inverse exchange-traded funds (L&I ETFs) can help bolster the local market for these products.

“The Hong Kong ETF market is still dominated by physical ETFs tracking local/China A-share indices,” Joanne Siu, associate director of marketing, ETF & Index, at South Korea’s Samsung Asset Management (SAM), tells Asia Asset Management (AAM).

Despite the small market share of foreign index tracking L&I products, she believes the recent introduction of L&I products tracking domestic indices will boost their popularity among local investors.

“As the tracking indices are more familiar and comfortable to Hong Kong investors, we expect Hong Kong investors would find them more attractive than foreign index tracking products,” she says.

The first batch of L&I ETFs were rolled out in June 2016, four months after the Securities and Futures Commission (SFC), the Hong Kong regulator, approved rules for these products that track equity indices outside of Hong Kong and the Mainland.

In January 2017, the regulator gave the green light to fund managers applying to launch L&I products that track local equities indices. This led to a rush of product launches tracking the Hang Seng Index (HSI) and the Hang Seng China Enterprises Index (HSCEI) last month. Issuers included SAM, South Korea’s Mirae Asset Global Investment (MAGI), and CSOP Asset Management (CSOP), China Southern Asset Management’s Hong Kong offshore platform.

Currently, there are 30 L&I ETFs listed on Hong Kong Exchanges and Clearing (HKEX), including 17 products tracking local indices.

Melody He, head of ETF and index solutions group at CSOP, tells AAM that L&I ETFs tracking HSI and HSCEI indices have performed very well since listing and have received “warm and positive” market response.

As of April 7, the aggregate market size of HSI & HSCEI L&I products listed on HKEX reached US$557 million, with an average daily turnover of HK$587 million (US$75.5 million) since their listing on March 14, according to CSOP.

“With the market recognition towards L&I products increased, L&I ETFs will definitely take up a huge market share in the ETP (exchange-traded products) market, which we have already seen in other Asian markets,” says Ms. He.

David Quah, head of ETF at MAGI, agrees. He expects the share of L&I ETF products in the ETF market to grow to over 20% by the end of this year, up from one-tenth currently.

MAGI has seen average daily turnover of its L&I products tracking HSI & HSCEI grow to approximately HK$100 million since they were launched, compared to only HK$1 million from L&I products tracking foreign indices, he says.

Ms. Siu believes investors’ market outlook affects L&I products. “Investors should consider L/I (L&I) products as a short-term investment tool, which may enhance their current portfolio during the up market, or hedge their position during the down market, depending on their short-term market outlook.”

Mr. Quah says L&I products target conservative investors who want higher yields than traditional ETFs, but lower risk than derivatives such as warrants. He says Hong Kong investors tend to favour leveraged products over inverse products as they only invest when they expect the market to perform well.