One of the most significant global investment trends over the last decade is the rise of the exchange traded fund (ETF). Relatively low fees and broad index-based exposure have made these passive investment products extremely popular all over the world. In Asia Pacific, assets under management by ETFs have surged six times over the last ten years¹, and Hong Kong has played an important role in the development of the regional market.

Hong Kong is Asia ex-Japan’s fourth largest ETF market, home to 162 exchange traded products with a total market cap of HKD 443 billion (USD 56.8 billion)². What makes the city’s ETF market stand out is not its size, but its broad investor base. Unlike markets in Mainland China and South Korea, which are dominated by domestic traders, Hong Kong ETFs attract investors from all over the world.  

“Hong Kong ETFs are a gateway for international investors to invest not just in Hong Kong, but also in Mainland China and the rest of Asia,” said Rebecca Chua, Managing Partner, Premia Partners – a Hong Kong-based ETF issuer that has products providing exposure to a diverse range of Asia investment themes, including China government bonds and high-growth ASEAN countries.

Facilitating two-way flows

ETFs therefore highlight Hong Kong’s unique connectivity. The city has for many years facilitated flows from Europe and the US to its local market and into Mainland China. But now the flow of capital is more two-way, with Hong Kong’s ETF’s attracting more money from new markets.

“We are not only open to international investors, we also enjoy an untapped source of onshore Chinese investors, who are accessing offshore-listed ETFs for the first time,” said Ding Chen, FSDC Board Member, and Chief Executive Officer of CSOP Asset Management – an asset management company with ETFs covering mainland China, Hong Kong and US markets.

The local ETF market’s two-way connectivity received a boost in the summer, when ETFs were added to Stock Connect. This long-awaited move enables investors in Hong Kong to trade 83 ETFs listed in Mainland China via the northbound channel, while onshore investors can use the southbound to buy and sell four ETFs listed in Hong Kong.

Only a couple of months after the addition of ETFs to Stock Connect, southbound trading has grown rapidly, driven by demand among onshore investors for portfolio diversification, with volumes for the four available products already at HKD 8.16 billion (USD 1.04 billion) in August – nearly double the amount in July³.

Another important trend is the development of intra-regional flows: “We are seeing an increasing number of Asian institutions starting to trade ETFs listed regionally, and Hong Kong is well-positioned to capture this shift in trading behaviour,” said Ms. Ding.

Issuance and secondary trading

The local ecosystem is highly conducive for ETF issuers to launch products in the city. In terms of market infrastructure, the Stock Exchange of Hong Kong is one of the world’s largest stock markets and consistently the global leader for capital raising. The city also excels due to its concentration of talent.

“For ETFs to function well it takes a high degree of coordination with various market participants, and for issuers whether the ecosystem has infrastructure and people conducive to growth is critical,” said Ms. Chua. “In addition to accessing international investors, Hong Kong as an international finance centre also has a wide range of global market participants – brokers, market makers, and other professionals – who all invest resources and are important builders for the success of Hong Kong’s ETF market.”

The healthy development of the ETF market will also help increase the overall liquidity profile of the Hong Kong market, according to a recent FSDC research report⁴. Increased demand for ETFs creates opportunities for the market makers that create and redeem units of the funds for investors. This is a high-volume trading activity that makes it easier for investors in the broader market to buy and sell stock in larger quantities without moving the price.

In its report, FSDC recommended several enhancements to enhance trading activities that will benefit both ETFs and market makers. These include introducing a new spread table with tick sizes more suitable for Hong Kong-listed stocks, increasing the maximum spread range requirement, and extending the market maker short-sell permission for manual trades.   

Positive for Hong Kong

As demand for ETFs increases, asset managers will issue more products that provide exposure to an ever-broader range of assets. At the same time, the positive spill-over effect to second market trading will benefit all market participants. The growth of the local ETF market is a highly positive development for Hong Kong, and it will remain an important area of development in the coming years.

¹ETFGI

²HKEX

³Ignites Asia

⁴FSDC