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EIP readies more ETF launches in HK

ETFs from several firms are expected to roll out in Hong Kong in the next three months, hoping to catch the ETF Connect train and feed the appetite of mainland investors, said Tobias Bland, Enhanced Investment Products CEO.

The firm runs the XIE Shares Hong Kong ETF platform, which is 49% owned by CLSA Hong Kong, whose parent is CITIC Securities.

Bland expects the ETF Connect scheme, which allows cross-border sales of qualified Hong Kong-domiciled ETFs, to commence in the second quarter next year.

“What Chinese retail investors will be looking are non-RMB assets for portfolio diversification, and dollar yield. That’s why I think the fixed income ETF area will be quite hot in the Connect,” he said.

More ETF launches

The firm plans to launch ETFs in Hong Kong and they are currently discussing the number and type of products.

“An ETF only breaks even when there is $25m worth of assets, so you need to find the demand.”

To qualify for the Connect, eligible ETFs have to be domiciled in Hong Kong and have a one-year track record. The XIE Shares FTSE Chimerica ETF, which buys US-listed Chinese companies, is qualified for the scheme, according to the firm.

Bland expects retail investors to show interest initially. “There’s is a huge retail investor base who are very active and want to use the Connect to buy offshore stocks, which should drive the volume up. That includes some high net worth investors as well.

“The daily turnover also needs to reach $500,000 a day to break even. As soon as you get the retail investors to start investing, it’s much easier to sell an ETF.”

The big pie is the mainland insurance companies. Earlier this month they were given permission to buy through the Connect.

“Classic insurance allocation has certain allocation in global fixed income, global equities and alternatives. As long as you issue products that are non-China, and non-China correlated, I think the [onshore] insurers and corporate pension funds will be investing because they want to decrease the correlation to China.”

Bland noted that regulatory difficulties have dampened interest from both investors and issuers.

In particular, the commission-based advisory model, in which the fund houses pay commission to the distributors, means private banks in Asia have very little incentive to sell ETFs. The commission-based model was recently scrapped in the US and Australia, he added.

As a result, ETFs have had trouble gathering assets in Hong Kong.

That explains why big players like Blackrock and Vanguard aren’t issuing products like smart-beta ETFs in Hong Kong, Bland said. “They want to direct investors to buy their US- or Europe-listed ETF products instead as they are already liquid.”

At the moment, Hong Kong has 145 ETFs (excluding RMB share class), plus six leveraged and inverse products. Average daily ETF turnover hit HK$3.4bn ($438m) in July.

There are six smart-beta ETFs listed in Hong Kong, including XIE Shares CLSA GARY ETF, and five by Value Partners tracking China and regional stocks.

Part of the Mark Allen Group.