EIP exits Hong Kong’s ETF market

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The firm is disappointed with the lack of progress in developing the Hong Kong-China ETF Connect programme.

Hong Kong-based Enhanced Investment Products has delisted its three remaining ETFs listed in Hong Kong, according to filings from the Hong Kong Exchange.

The multiple delisting marks the firm’s exit from the local ETF market.

The pulled products are the Xie Shares FTSE Gold Miners ETF, the FTSE Chimerica ETF and the Chimerica FTSE N Share Daily (2x) Leveraged Product. The last trading day for the products will be in May.

The move follows the firm’s delisting of its CLSA Gary ETF in October last year, which had assets of HK$24.7m ($3.2m).

“ETFs are at a distinct disadvantage in Hong Kong compared to other types of funds as they do not pay retrocession fees to distributors"

Andrew McCabe, EIP’s head of beta products, cited different reasons for delisting the products, one of which is the low AUM the products have gathered.

Product

AUM

Xie Shares FTSE Gold Miners

HK$12.15m ($1.4m)

FTSE Chimerica ETF

HK$37.42m ($4.78m)

Chimerica FTSE N ShareDaily (2x) Leveraged Product

HK$6.33m ($810,000)

Source: HKEX

“Whilst this has been a difficult decision to make, it is necessary due to the high setup and running costs of ETFs in the Hong Kong market.

“ETFs are at a distinct disadvantage in Hong Kong compared to other types of funds as they do not pay retrocession fees to distributors. Until such fees are banned like in many other developed markets, distributors will continue to sell higher margin products over ETFs,” he told FSA in an e-mail reply.

Previously, EIP said that an ETF product only breaks even if it has around $25m worth of assets.

A number of fund managers also delisted their products last year due to lack of assets, including those managed by Mirae Asset Global Invesments, GF International Investment Management, E Fund Management and Blackrock. In 2017 alone, around 35 products were delisted.

ETF Connect letdown

EIP’s McCabe added that the lack of positive developments in the Hong Kong-China ETF Connect, which allows cross-border sales of Hong Kong-domiciled ETFs, has contributed to its decision to delist its products.

“The ongoing lack of clarity and communication around the ETF Connect has contributed to our decision.

“Whilst this programme was heavily expected to take off in late 2018, lack of positive developments in this space and conflicting media reports have led us to conclude that it is unlikely to launch in the near term.

“The launch of the ETF Connect program, along with the banning of retrocession fees would be significant catalysts for ETFs in Hong Kong. We may consider listing products in the future should these issues be resolved.”

The planning of the ETF Connect has been underway since 2016 as part of the Mutual Market project of the Hong Kong bourse. The exchanges in Hong Kong, Shanghai and Shenzhen had expected to launch the scheme by the end of 2017, but regulatory and technical issues have delayed the original plan.

One major hindrance has been the requirement of the mainland’s primary regulator to access the identities of investors who use the existing Stock Connect schemes. It sees the identification of investors as a prerequisite to implementing ETF Connect.

The preliminary framework of the identity disclosure to the mainland’s regulator was ready last year and its implementation was expected in the first half of 2018. However, there has been no announcement from any of the bourses.

A number of fund managers were hoping to tap the onshore Chinese market via the ETF Connect scheme, including BMO Global Asset Management and Samsung Asset Management.

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