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Leveraged and inverse ETFs debut in HK

Samsung Asset Management has launched Hong Kong’s first leveraged and inverse ETFs.

The products track Korean and Japanese indices because the Securities and Futures Commission so far only approved structured ETFs tracking overseas equity indices outside the mainland and Hong Kong. However, it will review that restriction after six months.

The leveraged products offer twice the daily performance of the index, while the inverse ones allow 1x inverse of the daily movement.

One pair of products – Samsung KOSPI 200 Daily (2x) Leveraged Product and Samsung KOSPI 200 Daily (-1x) Inverse Product – track the 200 largest companies listed on the Korean bourse.

Another pair – Samsung TOPIX Daily (2x) Leveraged Product and Samsung TOPIX Daily (-1x) Inverse Product – have an underlying index comprising the large caps listed on the Tokyo Stock Exchange.

Koo Sunghoon, CEO of Samsung Asset Management, said at a Hong Kong briefing that he hopes the products will follow the same pattern as in Korea.

“As seen in Korea, institutions always find [inverse ETFs] a convenient and useful way to short the markets.”

The Korea launch of leveraged and inverse products also brought in retail investors and raised interest in ETFs generally. The L&I ETFs “acted almost like a catalyst which brought new demand to the ETF market”.

Sunhwa Kim, senior portfolio manager of the ETF and index team based in Hong Kong, told FSA that institutional demand for these products in Korea, especially inverse ETFs, are mainly driven by private banks and independent financial advisers.

“I think the private banks in Hong Kong would have a big interest in our products,” Kim said. “Other leveraged and inverse products in Hong Kong, like callable bull/bear contracts (CBBC) and warrants, are difficult to manage risks as their leverage ratios are constantly changing. The ETFs, however, have a consistent ratio.”

In Korea, Samsung also launched one ETF tracking the FTSE China A50, and two years ago a leveraged ETF – KODEX China H Leverage – tracking the Hang Seng China Enterprise Index. “The overseas market where Korean investors show the most interest is China,” she said.

“Korean investors enjoy the volatility. Compared to mutual funds, ETFs are easy to buy and sell, and there are no penalty fees.”

However, the L&I products are more complex than standard ETFs and regulators have taken notice. In the US, the Securities and Exchange Commission recently charged Oppenheimer & Co for its improper sales of leveraged, inverse and inverse-leveraged ETFs, which resulted in about $3m in fines and reimbursements as settlements, Reuters reported.

Commenting on the case, Koo stressed that investor education is very important.

Part of the Mark Allen Group.