Across The Border

More Hong Kong exchange traded funds seen delisting next year as product lines overhauled

PUBLISHED : Wednesday, 14 December, 2016, 4:33pm
UPDATED : Wednesday, 14 December, 2016, 9:37pm

Hong Kong will see more exchange traded funds (ETFs) delisted next year as fund managers continue to overhaul their product lines amid slow asset growth and low turnover.

“I believe there will be more delistings in Hong Kong,” Eva Chan, a partner at law firm Simmons & Simmons, which has advised on over two thirds of the ETFs in the city, told the Post.

She said delisting was a healthy trend for the ETF market as fund managers can reallocate the resources to more profitable products or launch new ETFs that cater to investor interests.

Delistings may be seen among overlapping ETFs due to fierce competition and sluggish growth of assets under management (AUM), Chan said.

So far this year, fund managers have announced plans to delist 26 ETFs from the Hong Kong market that currently has 182 tradable ETFs, according to a Post review of filings with the Hong Kong Exchanges and Clearing.

Jackie Choy, Morningstar’s director of ETF research for Asia, said such a number of delistings has not been seen in at least three years.

The most common reason for delisting was a low level of AUM, making it expensive to keep the ETF going, Choy said, adding that most of the 26 delisted ETFs accumulated only HK$10 million to HK$70 million in AUM.

“I won’t be surprised if there are more delistings next year,” Choy said, pointing out that delisting is normal in overseas markets.

Most of the Hong Kong ETFs recorded slim trading turnover and low AUM levels, except for a handful of popular products such as the Tracker Fund.

BlackRock, the world’s largest asset manager, announced in November it would delist seven ETFs in the city. Six of them, including five synthetic ETFs that track the CSI A-share sector indices and one that tracks the dim sum bond index, will halt trading on Friday and delist on February 24, according to its filing to the local exchange.

The delisting of BlackRock’s iShares CSI A-Share Financials Index ETF is pending voting in a general meeting with investors.

“It is the culmination of a lot of work to overhaul our product range in Hong Kong so it meets evolving market needs. We will be adding another physical A-Share ETF to our line up through the iShares CSI 300 A-Share Index ETF,” said a BlackRock spokesman, who request anonymity.

The ETFs were closed because market conditions are now different compared to when they were launched, the spokesman said.

“Broadly, BlackRock prefers physical ETFs for their simplicity of structure. However, for markets that are hard to access, derivative based ETFs are sometimes required. That has been the case for the China A-Share market until recent years,” the BlackRock spokesman said.

Compared with physical funds, synthetic ETFs are more expensive as they don’t directly buy the assets in benchmark indices, but buy financial derivative instruments to replicate the benchmark’s performance.

I think delisting is an ongoing trend in the industry. That’s a healthy outcome
Tobias Bland, chief executive of Enhanced Investment Products

Chan expects to see a decrease in synthetic A-share ETFs in Hong Kong as the enlarged quota for renminbi qualified foreign institutional investors (RQFII) and the cross border stock connect schemes allow fund managers to directly buy assets in A-share benchmarks and launch physical ETFs. But there is still demand for synthetic ETFs to track emerging markets with limited market access, she said.

BlackRock’s move came after Deutsche Asset Management announced in October it would delist a synthetic ETF, and after Ping An of China Asset Management (Hong Kong) Company closed two A-share related ETFs in the same month.

In September, Enhanced Investment Products Limited (EIP) announced it would delist seven synthetic ETFs that track Asian markets like India, Korea and Taiwan.

“I think delisting is an ongoing trend in the industry. That’s a healthy outcome,” said Tobias Bland, chief executive of EIP.

Bland said his company decided to delist the ETFs after supporting them for four years because there wasn’t enough demand and the delisting allowed the firm to concentrate on existing ETFs and upcoming leveraged and inverse products.

ETF issuers “design” an ETF when they believe a certain asset is of market interest at a particular point in time. Besides changing market conditions, as much as six months of consultation by the Securities and Futures Commission before the ETF issuance also makes it hard to time the market, Bland said.

Meanwhile, brokers and private banks are paid distribution fees for selling mutual funds to retail investors, but there’s no such incentive for distributing the low-cost ETFs.

ETF managers currently see greater demand from institutional investors in Asia as retail investors are encouraged to buy more expensive mutual funds, Bland said.

“There’s no downside to delisting. What needs to be done is to make listing and delisting a more efficient process. Legal costs associated with listing and delisting are very high,” he said.