Mainland investors help ETFs grab record share of Hong Kong trading

The average daily turnover of Hong Kong-listed exchange traded funds rose to a record high of 15.5 per cent of the stock market’s total turnover in July at HK$15.9bn ($2.04bn), according to Hong Kong Exchanges and Clearing (HKEX) data analysed by Ignites Asia.

The new high was driven by mainland Chinese investors piling into the market since the Hong Kong-China ETF Connect scheme was established a year ago. It also follows the introduction of a higher stamp duty for stock trading that has affected turnover volumes.

ETF trading on the bourse rose to 15.5 per cent of the average daily trading last month, up from about 9.8 per cent in July 2022 and 4.6 per cent in July 2021.

ETFs were the only products traded on the bourse that to have registered an increase in average daily turnover over the past 12 months, according to the data.

This article was previously published by Ignites Asia, a title owned by the FT Group.

HKEX said the addition of ETFs to the Hong Kong-China Stock Connect scheme had been “one of the key drivers” of the growth in Hong Kong’s ETF trading over the past year.

The launch of ETF Connect kicked off at the start of July 2022 with the approval by mainland Chinese and Hong Kong exchanges of eligible ETFs providing mutual stock market access between the mainland and the territory.

The cross-border trading scheme debuted with an additional 83 mainland-listed ETFs, including 53 in Shanghai and 30 in Shenzhen, which could be traded by international investors on the Hong Kong bourse via the northbound Stock Connect route, and has since been expanded on a number of occasions.

The bourse operator last month added 34 Chinese ETFs to the cross-border investment scheme to bring the total to 131 Chinese ETFs available to non-mainland investors.

The number almost equals the 151 ETFs (not including the 25 leveraged and inverse products) that were originally listed on the Hong Kong exchange, as of end-July.

Meanwhile, trading of Hong Kong-listed ETFs by mainland Chinese investors via the southbound ETF Connect scheme has risen steadily over the past 12 months, hitting a peak in June.

The average daily turnover of the six ETFs traded on the Hong Kong exchange via both the southbound Shanghai and Shenzhen links reached HK$4.64bn in June, more than seven times the HK$624mn in January and up from just HK$215mn in July last year, the first month of the scheme.

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HKEX said “both retail and institutional investors in mainland China have become more aware of the potential advantages brought by ETFs”, adding that such awareness had resulted in “a growing demand for Hong Kong-listed ETFs”.

The exchange pointed out that investors’ strong demand for thematic ETFs had also contributed to the market’s growth, recording an annual growth rate of more than 120 per cent over the past three years.

The assets of ETFs and leveraged and inverse products listed on the Hong Kong bourse, excluding China-listed ETFs traded in the territory, remained largely flat over the past year.

The bourse had 173 ETFs and leveraged and inverse products with a combined market capitalisation of HK$403.81bn as of the end of April, down 5 per cent from the HK$426.63bn held by 165 products in July 2022, according to the latest available data from the exchange.

*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at ignitesasia.com