Author: Chief China Economist's Office, Hong Kong Exchanges and Clearing Limited
REPORT SUMMARY
Exchange traded funds (ETFs) have become increasingly popular in global markets. These products are more cost-effective, convenient and transparent than traditional mutual funds, leading to rapid growth in both the global number of ETFs and their assets under management (AUM).The growth is accompanied by innovation and diversification of products as well as increased use of fixed-income ETFs. While the growth in the US and European ETF markets continued, the ETF growth momentum in Asia Pacific is remarkable. Hong Kong has been one of the leading ETF markets in Asia Pacific while the Mainland ETF market is growing significantly in recent years to be the second largest in Asia Pacific upon Mainland investors’ increasing acceptance to passive investments.In respect of passive investments, Mainland investors can currently investonly in ETFs listed in the Mainland. Equity ETFs on a large variety of Mainland indices have dominated the market. Money market ETFs have become attractive owing to better yields than deposit rates. In addition to ETFs, listed open-ended funds (LOFs), which are traded like ETFs, provide convenient investment choices of active returns. However, ETFs and LOFs on global equity indices have been subject to time delay to receive cash in case of redemptions in the primary market. Besides, Mainland-listed funds are traded in the Renminbi (RMB) only. These hint at the potential demand of Mainland investorsfor access to the Hong Kong ETF market for global asset allocation and international currency exposure. The Hong Kong ETF market is a door to global investment. It offers products on diversified asset classes from global markets and a well-established institutional investor base to support market liquidity. The Hong Kong ETF market offers a high degree of global equity market exposures, including Hong Kong stocks, Mainland A shares, Asia-Pacific and other overseas equities. It also covers asset classes of fixed income and currency as well ascommodities in the global markets. In addition, a number of ETFs on global indices are traded in multiple currencies, including the Hong Kong dollar(HKD), the RMB and/or the US dollar (USD), which can fit the diverse needs of global investors. ETF investors in Hong Kong can also enjoy the high market depth, competitive tax savings as well as an ecosystem of associated risk management tools.The Hong Kong ETF market is also attractive to issuers who can enjoy a relatively market-friendly regulatory environment, a broad base of global institutional investors and an effective market making mechanism that ensures secondary market liquidity and facilitates arbitrage activities in the primary market. Besides, ETF issuers in Hong Kong can benefit from the geographical advantage of “Trade Asia in Asia” for hedging risks in the underlying markets for their Asian products.Hong Kong is well-positioned to be Asia’s ETF marketplace for the issuance and trading of ETFs. The Hong Kong ETF market can not only meet the needs of global investors, but also the demand by Mainland investors potentially. Given the relatively low institutional participation for supporting ETF primary market activities and the limited ETF coverage of global assets in the Mainland market, the Hong Kong ETF market with diverse products and investor base would be attractive to Mainland investors who have shown growing interests in ETF investments. Conversely, the large variety of ETFs on Mainland assets in the Mainland market would also be attractive to global investors in Hong Kong. The potential mutual access of the Mainland and Hong Kong ETF markets1 would facilitate a more balanced mix of investors in the ETF primary and secondary markets on both sides, accompanied by a widened spectrum of ETF products. Further development in Mainland-Hong Kong market connectivity in respect of the ETF segment will therefore be conducive to the mutual growth of the two markets.