The iShares MSCI Emerging Markets ETF (HK) is the first Hong Kong-listed feeder ETF to be launched since the Securities and Futures Commission (SFC) allowed asset managers to set-up an index-tracking ETF that adopts a master-feeder structure.
“Increasingly, ETFs are becoming an integral part of active management for all types of investor in order to enhance performance and better manage risk,” Susan Chan, APAC head of iShares and index investments at Blackrock told FSA in an interview.
The new fund offers exposure to the MSCI Emerging Markets Index at a total expense ratio of 0.18%, with the choice of US and Hong Kong dollars as the trading currency. It should appeal to both retail and institutional investors, and its initial size is likely to be about $13m, according to Chan.
“Relaxation of the SFC’s master-feeder regime now allows ETF providers to expand product offering in the city in a more cost-efficient manner, and at the same time offer investors a diversified range of Ucits products previously unavailable at local level,” she said.
Blackrock’s iShares division has a range of around 900 ETFs with assets of $2.16trn as of 30 June 2020, according to a media release.
It chose the Ireland-domiciled $3bn iShares MSCI Emerging Markets ETF as its inaugural feeder fund in the territory because of strong client demand for the asset class, the high trading volume of the underlying index, and its 75% exposure to Asia stocks, according to Chan.
“Now, investors in the region will be able to trade the fund in their own time zone,” she said.
Coincidently, the HKSE recently launched an MSCI Emerging Markets futures contract, which can provide Asian investors with better intraday valuations across emerging market securities, Chan said, adding that the introduction of traded options might follow soon.
There are already 10 standalone Hong Kong-listed iShares ETFs, mostly with Asian equity mandates, including products linked to the major China, Hong Kong, India, South Korean and Taiwan indices, according to the firm’s website.
“The Asia ETF market is at a nascent stage, but it is growing at 15% a year, which is faster than the more established centres in the US and Europe,” said Chan.
Master-feeder fund structures might encourage more take-up by investors in the region, because they can give them access to large, well-established ETFs.
A feeder fund directs all of its assets into a master fund which makes the investment decisions and conducts all trading activity. The feeder fund participates in the profits of the master fund in proportion to the amount invested in the master fund.
Among several conditions, the new SFC rules require that the feeder ETF must be domiciled in Hong Kong and managed by a firm that has a Type 9 (asset management) licence with the SFC, and that the foreign-listed ETF has assets of at least $1bn, a five-year minimum track record and must adopt a physical replication of the underlying index.
ETF trends
Separately, Blackrock has seen the strongest iShares inflows worldwide channeled to fixed income and “sustainability” ETFs this year, with growth accelerating since the outbreak of the Covid-19 pandemic.
“As in 2008, fixed income ETFs have again provided investors with liquidity in distressed conditions, when there were severe price dislocations especially in the high yield segment of the underlying market,” said Chan.
Meanwhile, iShares ESG products have attracted $17.7bn of global inflows so far this year, double the amount for the whole of 2019, she said.
“Investors want sustainable themes, and their importance has been reinforced by the Covid-19 outbreak and fears that pandemic might continue for some time longer.”
Other thematic ETFs that have attracted substantial inflows this year include technology and healthcare products, she added.
