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Sailing through headwinds

By Hui Ching-hoo   
  • Asia
  • China
Hong Kong ETFs see record turnover despite market turbulence

Hong Kong’s exchange-traded fund market is moving from “strength to strength” with steadily growing trading volumes, according to Brian Roberts, head of exchange-traded products at Hong Kong Exchanges and Clearing Limited (HKEX), who believes the momentum is sustainable through this year as the city’s economy recovers from Covid-19.

Although geopolitical tensions and aggressive rate hikes in the US designed to tame inflation made for a turbulent global market environment that saw Hong Kong’s benchmark Hang Seng Index lose more than 15% in 2022, trading volumes of ETFs in the city surged. It’s a situation which Roberts ascribes to a more diversified investor base.

Figures from HKEX show that average daily turnover of Hong Kong ETFs reached a record HK$12 billion (US$1.54 billion) last year, a 56% jump from HK$7.7 billion in 2021. 

“[Asia Pacific] ETFs have hit an inflection point as institutional investors are increasingly eager to invest in ETFs for strategic asset allocation,” Roberts says in an interview with Asia Asset Management. 

He cites the simple structure and tax efficiency of Hong Kong ETFs as strengths that give them the edge over rivals in attracting new institutional capital. For instance, investors in the US have to pay a 30% withholding tax on dividends from ETFs and other securities investments, but these are exempted from tax in Hong Kong. 

Roberts is also upbeat on the development of innovative ETF products in the city and believes there is still plenty of room for growth. 

“We continuously talk to market makers and the Securities and Futures Commission [SFC] on product innovation,” he says. “One advantage we have is that the SFC is a globally recognised regulator. Investors are looking to us to bring out innovative products in a well-regulated manner.”

He points to the listing of the CSOP Bitcoin Futures ETF and the CSOP Ether Futures ETF in December as examples, citing these as the first crypto asset ETFs in Asia. 

“The SFC listened to the ETF community [about demand for crypto ETFs], but they brought out a well-regulated framework that the funds are only allowed to track bitcoin and ether, and they need to be held in well-regulated futures contracts,” he says. 

Transaction costs

According to Roberts, HKEX will press ahead with bolstering market liquidity and lowering transaction costs in order to maintain Hong Kong’s position as one of Asia Pacific’s ETF hubs.

In 2020, the Hong Kong government exempted stamp duty for market makers of underlying stocks in ETF portfolios. HKEX figures show that this helps to save as much as HK$4.7 billion in ETF creation and redemption costs. 

“Compared to our regional rivals, we’ve probably been one of the most forward-thinking and innovative in terms of market structure changes such as trading spread reduction,” Roberts says. Trading spread refers to the difference between the bid and offer prices of an ETF. 

One long-awaited development came to fruition last year when ETF Connect, a cross-border scheme that links the Hong Kong and China markets, was officially launched in July 2022. 

Roberts says the scheme has gradually picked up steam after a slow start, with southbound trading – referring to Mainland investments in Hong Kong ETFs – reaching over HK$900 million a day. This accounted for about 9% of Hong Kong’s overall ETF turnover, excluding leveraged and inverse products, in the second half of 2022.

“For an initiative that’s new, it provides a meaningful growth activity for the Hong Kong ETF market,” Roberts says, adding that various ETFs will be added to the scheme as it grows.

In spite of the record daily turnover, total ETF assets in Hong Kong dropped 10.48% to HK$384 billion last year from HK$429 billion in 2021.

HKEX attributes the decline primarily to the delisting of the Hang Seng Index ETF in September by Hang Seng Investment Management. The move was part of the process of the local firm taking over management of the Tracker Fund, the city’s largest ETF, from US manager State Street Global Advisors in March.