Four fund managers to launch first batch of leveraged and inverse exchange-traded funds on March 14

Mainland’s CSOP Asset Management and China Asset Management, and South Korea’s Mirae Asset Global Investments and Samsung Asset Management will each list four ETFs

PUBLISHED : Thursday, 09 March, 2017, 9:02am
UPDATED : Thursday, 09 March, 2017, 9:02am

Four fund managers are to launch Hong Kong’s first-ever batch of leveraged and inverse (L&I) exchange-traded funds that will track the city’s Hang Seng Index (HSI) and H-share Index, allowing short-term investors to ride upside trends for double gains, or hedge against uncertainty ahead of any so called, expected “black-swan” events.

The mainland’s CSOP Asset Management and China Asset Management, and South Korea’s Mirae Asset Global Investments and Samsung Asset Management will each list four ETFs on March 14: a twice-leveraged ETF for the HSI, an inverse ETF for HSI, a twice-leveraged ETF for the H-shares Index, and an inverse ETF for H-share Index

ETFs are funds traded at the exchange like stocks, which passively track an index or a commodity.

An inverse ETF effectively delivers the opposite of a daily return of an index, while two-time leveraged ETFs double the return when benchmarks surge.

Hong Kong regulator, the Securities and Futures Commission (SFC), gave the green light to fund managers applying to launch L&I products that track local equity indices in January, six months after the city was offered its first batch of L&I ETFs that track non-Hong Kong, non-mainland foreign equity benchmarks or commodities.

Hong Kong sees first leveraged and inverse exchange-traded funds amid volatile market

The L&I ETFs for the Hang Seng and H-share indexes are likely to attract interest from retail investors for trend trading or hedging against unpredictable events, explained Alvin Li, chief strategist of ETF and index solutions at CSOP Asset Management, and Hongkongers’ familiarity with local benchmarks are expected to make the product category popular.

Based on 2016 data, if investors bought into a two-time leveraged ETF if the Hang Seng Index rose 1 per cent and sold the ETF five days later, which happened 24 times in 2016, it would have brought in an average 33 per cent return to investors, Li said.

Adding inversed ETFs into portfolios ahead of uncertain events like the US presidential election or Brexit vote will allow investors to hedge the risks, without selling off stocks they already hold, Li added.

L&I ETFs have been popular in major Asian markets like Japan, Taiwan and South Korea for years.

In Japan, turnover of L&I ETFs is nine times that of traditional ETFs, while in Taiwan it is three times higher.

In South Korea, which introduced L&I ETFs in 2009 and 2010, L&I products have 50 per cent higher turnover than normal ETFs.

Coming soon: Leveraged and inverse exchange traded funds

Compared with derivatives, such as warrants and callable bull/bear contracts (CBBCs) where issuers also take the role as the only market maker, ETFs have several market makers, allowing more transparency in pricing, said Joanne Siu, Samsung Asset’s associate director of marketing at its ETF & Index team.

Following the launch of L&I products that will track Hong Kong benchmarks, industry players are also likely to eye the possible launch of L&I ETFs that track the A-share market, with more wealth management firms expected to join the fray.

“[A-share L&I products] would depend on whether mainland and Hong Kong regulators give the go-ahead to fund managers,” Li said.

Hong Kong currently has 13 L&I products, issued by the four players above, and XIE Shares.

More fund managers from the mainland, Hong Kong and foreign markets are likely to join the competition and diversify their product categories, Li said.

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