Hughes said the Hong Kong-Shanghai stock connect, set to launch November 17, has energised Nasdaq’s efforts to build the ETF market in Hong Kong.
“As soon as the stock connect program hit the wires, ETF sponsors in the US and Europe were calling and asking what we are going to do in Hong Kong and how can they approach the market.
“A new access point to the A-share market creates tremendous interest in the developed world. Retail and institutional investors are interested, brokerages may want to open here, ETF managers can maybe run an ETF here. Don’t underestimate how much interest there is in access to Chinese markets.”
In 2014, Asia Pacific-listed ETF products have so far attracted $17bn in new assets, or 8% of total global new inflow, according to Nasdaq data. Asia’s rate of growth is third behind the US and Europe.
Hughes said ETF momentum needs to be driven by retail investors.
“Retail participation in the ETF market is the key to longterm success. You need a foundation of liquidity provided by retail investors that allows the institutional investors to come in and trade.”
In Hong Kong, retail investors represent 20% of the ETF market compared to roughly 60% retail and 40% institutional in the US, Hughes estimated.
“There is a tremendous amount of growth potential for ETFs here in Hong Kong, and for China retail investors, accessing global ETFs in Hong Kong is a new opportunity.”
ETFs, he said, are appealing to investors because they have transparency, low fees – about one-quarter of active fund fees – and are tax efficient.
Hughes added that in the US and Europe, only 3% of assets from ETF markets are exposed to China.
“The stock connect could potentially offer a US ETF firm easy access to the China market for the first time, if ETFs become part of the connect program, which we fully expect to see happen.”
Two Nasdaq indices are the basis for ETFs listed this week by BMO on the Hong Kong Stock Exchange: the BMO Hong Kong Banks ETF tracks the Nasdaq Hong Kong Banks Index, and the BMO Asia High Dividend ETF tracks the Nasdaq Asia ex-Japan Dividend Achievers Index.
But ETFs are unpopular in Asia for various reasons. In particular, the advisory business is still commission based (as opposed to fee-based), and therefore advisors have less incentive to use cheaper products like ETFs.
Since 2010, several ETFs have been launched in Hong Kong by global giants and yet have had difficulties gathering assets quickly: The SPDR FTSE Greater China from SSgA; iShares RMB bond index ETF from Blackrock and the FTSE Asia ex-Japan ETF by Vanguard.
Hughes brushed off competitive edge questions. He said Nasdaq is taking a longterm view of the market and the experience with ETFs from SSgA, BlackRock and Vanguard does not dampen expectations. He suggested the market simply needs a more comprehensive effort to educate exchanges and investors about ETF products.
“We are fully invested in the success of the ETF market. We are working with local partners around Asia to perpetuate education around ETFs and around our indices.”
Other ETFs Nasdaq wants to bring to Hong Kong include those tracking the biotechnology, multi asset income and technology indices.
“We want to bring investment themes that have been successful worldwide to Hong Kong and make it local.”
Nasdaq has been busy in the region. Last year, the Guotai Nasdaq-100 ETF, the first ETF in China based on a US Index, listed in Shanghai. Similar ETFs tracking the Nasdaq-100 have been launched in Korea, India and Japan.
Earlier this year, the Mirae Asset Tiger Nasdaq BIO ETF, based on the Nasdaq Biotechnology Index, launched on the Korean Exchange.
“We’ll probably see biotech ETFs in Hong Kong and China in the not too distant future.”
Despite the multi-jurisdictional nature of Asia, with widely varying regulatory regimes and different levels of development, Nasdaq has big plans in the region.
“We want a Nasdaq 100 ETF in Malaysia, Indonesia, Vietnam and Thailand. We still don’t have one in Australia.
“We look at Asia strategically and say we have to get in there and support the marketplace. We believe we can do a lot of education through our relationships with the many exchanges in the region.”