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Tumult in HK ETF market

New launches, delistings and fee cuts of ETFs continue ahead of the highly anticipated ETF Connect as well as the potential extension of L&I ETFs to track Hong Kong equities.
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New products launched in Hong Kong in the past month include Mirae Asset Horizons S&P Asia ex Japan Healthcare ETF, XIE Shares FTSE Gold Miners ETF and iShares Core Hang Seng Index ETF.

The latest ETF in Hong Kong rolls out today is the CSOP S&P New China Sectors ETF. The passive product tracks the S&P New China Sectors Index including the so-called new economy companies listed in Shanghai, Shenzhen, Hong Kong, the US and Singapore. Ongoing charge is estimated to be 2% a year.

CSOP head of ETF and index solutions, Melody He, said the China market is still at the developing phase in which sector ETFs might prove less popular.

“ETF markets in Asia are still under development and I believe at the first stage there are large cap-focused, broad market types of products.”

Heading to the next phase, products will be customised with special features, which includes a range of equity sectors. Then the next step will be individual sectors with a narrower range of stocks, she said.

Synthetic aversion

The recent launch of ETFs is in contrast to the recent delistings. In October, Enhanced Investment Partners delisted seven synthetic ETFs. In November, iShares announced it would shut all of its six synthetic A-share sector ETFs this month, blaming “relatively small net asset value and the relatively low trading volume”. They were listed in 2009.

Its iShares RMB Bond Index ETF, which tracks dim sum bonds, will also cease trading. It was listed in June 2013.

“The announcement is the culmination of a lot of work to overhaul our product range in Hong Kong so that it meets evolving market needs,” a Blackrock spokesman said.

“We are closing our CSI sector and RMB Bond Index ETFs that launched under different market conditions than those that we are experiencing today,” he continued.

It is despite the fact that performance of these sector ETFs have largely beaten the broad market indices over both the one-year and three-year horizon, according to data from FE Analytics.

 

 

The closures of ETFs also echoes the trend of issuers’ preference toward physical ETFs over synthetic ones, as reported earlier.  

In June, iShares launched a series of physical ETFs tracking benchmarks of different countries. It is now also transitioning both the iShares CSI 300 A-Share Index ETF and iShares FTSE A50 China Index ETF from synthetic to physical products.

Similarly, another synthetic ETF – W.I.S.E – CSI 300 China Tracker ETF – issued by BOCI-Prudential Asset Management, announced last week that it will gradually increase the physical nature of the product starting the beginning of next year.

It means that “direct investment in A-shares will ultimately become at least 70% of the net asset value of the fund”, according to the firm’s statement. The percentage stands at roughly 24.2% as of today, as disclosed in its website.

The only pure synthetic ETFs remaining in Hong Kong will be the 26 cross-listed ETFs by Deutsche Asset Management. The firm did not respond to request for comment.

Fee cuts

On the other hand, Value Partners is temporarily cutting fees for its gold ETF to test the waters.

The 15 basis point management fee will be scrapped until next June, the firm announced on Tuesday. The latest ongoing charge stands of 0.49% as of end of September.

William Chow, managing director of ETF business at Value Partners, said the promotion is aimed at educating investors on the use of ETFs rather than grabbing market share. “Commodity ETFs in Hong Kong only account for about 0.3% of market capitalisation of overall ETFs, while the five largest ETFs dominate by having 70% of market cap,” he said.

The firm said it will observe the market response before deciding whether to slash fees for its other five ETFs listed in the SAR.

Chow said the firm is looking at launching leveraged and inverse ETFs, as well as products to be traded via the ETF Connect, although the details are yet to be known. “We are also considering launching products in other Asian markets, not limited to the Greater China regions,” he added.

The price cut followed the delisting of ETFS Physical Gold ETF, a product of ETF Securities (HK), in August this year. There are now three gold ETFs in Hong Kong.

Other issuers such as Vanguard, BMO and iShares also cut the cost of investing in their Hong Kong-listed ETFs earlier this year with the aim of attracting more capital.

Harvest Global Investments said it would rather wait for more details such as product eligibility for the ETF Connect, than taking the guesswork to launch products beforehand.

Part of the Bonhill Group.