Hong Kong’s first batch of L&I ETFs tracking local stock indices to debut

14 March 2017   Category: News, Asia, China, Hong Kong   By Natalie Leung

Two mainland China asset managers’ Hong Kong-based subsidiaries and two South Korean firms will debut Hong Kong’s first leveraged and inverse exchange-traded funds (L&I ETFs) tracking local stock indices on Tuesday (March 14).

The funds, which will track the Hang Seng Index (HSI) and Hang Seng China Enterprises Index (HSCEI), will be listed on the Hong Kong Stock Exchange.

The issuers are Hong Kong-based China Asset Management (Hong Kong) Ltd (China AMC-HK), a fully-owned subsidiary of China Asset Management Co; China Southern Asset Management’s Hong Kong offshore platform, CSOP Asset Management; and South Korea’s Mirae Asset Global Investments and Samsung Asset Management. The companies will each list four L&I ETFs.

The rush to offer these ETFs started after the Hong Kong Securities and Futures Commission (SFC) gave fund managers the green light in January to launch L&I ETFs tracking local equity indices. Previously, the regulator only approved L&I ETFs that tracked equity indices outside of Hong Kong and the Mainland.

A total of 13 L&I ETFs tracking overseas indexes made their debut last year, but liquidity is moderate as these products are still new to many investors, says Vincent Chen, director of business development at China AMC-HK.

“If looking at the Asian L&I ETF markets such as Japan, Taiwan and South Korea, the popular products are those tracking the local equity indexes,” Mr. Chen says in an interview with Asia Asset Management.

Given the home market bias among investors, Mr. Chen expects his new L&I products to generate more liquidity and draw investors’ attention, as people like to invest in products with which they are familiar.

“We do expect the L&I ETFs tracking HSI and HSCEI would be the most successful product among other L&I products, unless there is a product tracking A shares index, which I don’t think will happen anytime soon,” says Mr. Chen.

China AMC-HK’s L&I ETFs are the ChinaAMC Direxion Hang Seng Index Daily (2x) Leveraged Product, the ChinaAMC Direxion Hang Seng Index Daily (-1x) Inverse Product, the ChinaAMC Direxion Hang Seng China Enterprises Index Daily (2x) Leveraged Product, and the ChinaAMC Direxion Hang Seng China Enterprises Index Daily (-1x) Inverse Product.

The two-time leveraged ETFs are designed to offer twice the daily performance of the index, while an inverse ETF will deliver the opposite of a daily return of an index.

The capped leverage, as required by the local regulator, positions the L&I ETFs between traditional ETFs and derivatives in terms of investment risk.

“Compared with the traditional ETFs, the risk would be larger due to the leverage, but at the same time the leverage is controlled in 2x and -1x,” says Mr. Chen. “So the risk is relatively lower than traditional derivatives like futures and warrants, where the leverage can go up to more than ten times.”

He says that if investors respond well to the new offerings, it will be an incentive for issuers to diversify into other types of L&I products. It may take around six-to-nine months to gauge market reaction, he adds.

China AMC-HK’s new products target retail as well as institutional investors such as mutual funds and insurance companies that may have restrictions on investing in derivatives.

Mr. Chen claims Hong Kong is still at an early stage compared with other Asian L&I ETF markets. The city’s derivatives market offers products such as warrants and callable bull/bear contracts which other markets do not have, which explains why local investors are used to trading derivatives with high leverage, he explains.

“But these investors sometimes need some more transparent products or products with simple structures like L&I ETFs to hedge their position or to get exposure to some kinds of asset allocation,” notes Mr. Chen. With their controlled leverage, these new products will also appeal to traditional ETF investors that are not used to trading derivatives-based products, he adds.