Staying competitive
Hong Kong’s exchange-traded fund market kicked off in 1999 with the launch of the Tracker Fund of Hong Kong. In the 25 years since, the city has witnessed competition from regional rivals such as Taiwan and South Korea, where ETFs have grown at breakneck speeds thanks to millennial investors.
Hong Kong has stayed competitive because of the breadth and depth of its product mix, according to Jean-Francois Mesnard-Sense, head of exchange-traded products at Hong Kong Exchanges and Clearing (HKEX). It is this diversity that will remain key to stave off challenges from rivals.
“Hong Kong is probably the most international ETF market in Asia Pacific in terms of issuers, investors and market makers,” Mesnard-Sense says in an interview with Asia Asset Management. “The diversity of products is the major strength. Market participants are highly diversified in Hong Kong.”
Over 30 new ETFs came to the market in the first ten months of 2024 alone compared to 16 in all of 2023, with market capitalisation growing 40% year-on-year to nearly HK$500 billion (US$64 billion). As of October, average daily turnover of exchange-traded products was HK$17.9 billion, up from HK$13.8 billion a year ago.
“We’re very pleased with the diversity of new products. Many of them are designed to track various overseas assets including US Treasury, Indian equities and Japanese equities,” Mesnard-Sense says.
He says investors gravitated towards ETFs, particularly during the volatile market environment through the Covid-19 years, drawn by such features as high liquidity and the ability to switch in and out of positions quickly. Bonds and thematic funds have been a special draw as investors sought steady incomes as well as access to fast-growing sectors.
ETF Connect
The HKEX has been taking steps to bolster market liquidity, most recently by allowing market makers to participate in the pre-opening and closing sessions of ETF auctions. This was introduced in November.
The bourse is also in the process of launching an online platform to digitise and automate the in-kind creation and redemption of exchange-traded products, scheduled to be rolled out by the end of 2025. “It will improve efficiency in the primary market and streamline the workflow of market participants,” according to Mesnard-Sense.
He believes the introduction of ETF Connect as part of the Stock Connect link between Hong Kong and China in 2022 was a major milestone as it allows eligible funds to be traded in markets on both sides of the border.
Initially, only four Hong Kong-listed ETFs were cleared for distribution in China through the programme’s southbound channel, while 83 Mainland ETFs were approved for trading in Hong Kong via the northbound channel. As of July 2024, the number of eligible funds for the southbound and northbound channels had increased to 16 and 225, respectively.
Mesnard-Sense believes Hong Kong ETFs with high international exposure will become popular among investors in the Mainland.
Financial regulators in Hong Kong and China have also been reducing the entry barrier for funds that are added to the ETF connect. In July, the minimum asset under management for northbound ETFs was cut from HK$1.7 billion to HK$550 million, and the weighting of Hong Kong stocks in their underlying benchmarks lowered from 90% to 60%.
According to Mesnard-Sense, this gives ETF issuers greater flexibility to develop innovative products.
Hong Kong is also diversifying the product scope of ETFs into virtual assets, and expanding connectivity with the Middle Eastern market, moves that Mesnard-Sense anticipates will “contribute to incremental turnover and market capitalisation to the ETF market”.