Coming soon: Leveraged and inverse exchange traded funds

The first batch of leveraged and inverse exchange-traded funds (ETFs) in Hong Kong is expected to be launched in the latter half of this year, said Jackie Choy, ETF strategist for Morningstar in Hong Kong.

Leveraged ETFs magnify gains or losses on an underlying index while inverse ETFs allow traders to profit from falling markets.

Andrew Craswell, vice-president of global ETF services at Brown Brothers Harriman, said leveraged and index products have proved to be popular in the US and Europe, and Hong Kong might have a strong demand for such products.

Choy said he would recommend investors use leveraged and inverse ETFs as portfolio risk management or hedging tools. He also expressed concern that some retail investors might want to use these products as speculative tools.

Hong Kong’s Securities and Futures Commission (SFC) gave the go-ahead to these products in February, but allows only ETFs tracking “liquid and broadly based non-Hong Kong, non-mainland foreign equity indices”.

“I believe subsequent batches will generate more interest when Hong Kong equity indices are allowed as investors here are more familiar with the local equity market,” Choy said.

The SFC has said it has kept open the option of adding to the list of the eligible indices for leveraged and inverse, or L7I in industry parlance, products but has no plans to accept applications for tracking mainland Chinese indices “at this stage”.

Craswell said L&I product issuers tend to be “quite niche and boutique-y” firms specialising in these products. “It’s more likely the specialist providers tend to issue these types of [L&I] products and that is certainly what we see in other markets. Mainstream asset management firms tend to stick to more conventional types of ETFs.”

Hong Kong has a limited range of ETF options, with most owning or replicating underlying assets to track an equity index in Hong Kong or China.

Craswell said US and European ETFs also began as equity index trackers but have diversified into commodities and fixed-income.

“Fixed income is a trend there, so maybe it has potential to be an opportunity here in Hong Kong,” he said.

This story has been corrected in the 3rd paragraph to say that Andrew Craswell is vice-president of global ETF services at Brown Brothers Harriman.