Hong Kong ETF market must build up ‘one-stop shop’ ahead of Connect launch, says bourse operator
More assets under management and product variety will increase liquidity, says head of exchange-traded products at HKEX
The Hong Kong exchange-traded fund industry needs more assets under management and product variety to fully benefit from the launch of the ETF Connect programme, said Brian Roberts, head of exchange-traded products at bourse operator Hong Kong Exchanges and Clearing.
Roberts, who said the industry was “setting itself up nicely”, added: “Larger assets under management will drive more liquidity to this market. We need to build out the product shelf because investors want a one-stop shop, and this is where the innovation we are seeing is just scratching the surface.”
The Hong Kong stock exchange is working with industry players to construct a market structure for the efficient creation and redemption of shares in ETFs, as well as pricing. An ability to facilitate good liquidity to cope with potential big buying demand was also needed before the ETF Connect was implemented, said Roberts.
The turnover in the city’s ETF market has increased by about 15 per cent per annum in recent years, but this has not translated into growth in assets under management. Investors have only bought a net US$842 million in ETFs this year, compared with net inflows of US$48 billion in the whole of Asia-Pacific, according to Bloomberg data.
In recent months, the Hong Kong market has seen new product launches for smart beta, strategic beta, thematic exposures and fixed-income ETFs in preparation for the ETF Connect, the cross-border trading scheme that is expected to be launched in the second half of this year. The scheme is expected to attract mainland investors interested in buying ETFs listed in Hong Kong, while Hong Kong investors will also be allowed to buy those listed in Shanghai and Shenzhen.
The success of the regional ETF market is limited by fragmentation between local exchanges, which prevents listings on multiple stock exchanges and hinders market growth, according to analysts. This also causes friction when it comes to subscriptions, trading, as well as clearing and settlement processes.
“There is so much demand in terms of wanting different types of ETFs. However, a majority of them are going to be filtered out. We need to change the way we look at liquidity and change the way we trade the ETF itself in Hong Kong,” said Curtis Tai, director of Asia-Pacific ETF sales and trading at Jane Street.
Mohamed M’Rabti, director and deputy head of capital markets at Euroclear, a major international provider of post trade services, said the issue of fragmentation in Europe was resolved with the creation of a central securities depositary.
And while Asian investors tend to prefer products that track local indexes, ETFs that track yuan-denominated A shares are increasingly being issued as China tries to internationalise its currency.
So a similar central securities depositary would help to remove the silos of Singapore, Hong Kong and Taiwan, and allow the listing of the same A-share ETFs in different exchanges to meet regional investor demand, said M’Rabti.
Melody He Xian, the in charge of ETFs and index solutions and head of structured solutions at CSOP Asset Management, a Chinese asset management company, said there was demand for cross listings of ETFs as these would allow local investors to buy ETF products in their local currencies.
ICBC Credit Suisse, GF International, Fullgoal Asset Management，and CCB International have all previously issued yuan-denominated ETFs that are domiciled in Europe, which allow European investors to gain access to Chinese investments.
“They took the first step to go to Europe and then let the assets build up within the ETF. But in the longer term, our platform can also enable them to cross list outside Europe, like in Hong Kong, or in Latin America, like in Mexico,” M’Rabti said.