Hong Kong fixed income ETF incentive meets tepid industry welcome
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The Hong Kong exchange’s decision to boost investor interest by waiving fees on fixed income and money market exchange traded funds is unlikely to have an immediate impact, industry participants say.
Hong Kong Exchanges and Clearing moved to waive trading tariffs and minimum stock settlement fees from May 31 in a bid to “enhance its ETF market structure and drive liquidity to Hong Kong-listed ETFs”, said Brian Roberts, HKEX’s head of exchange-traded products.
Roberts added that the policy came “at an opportune time” in light of the “strong increase in investor demand for China fixed income products”.
Hong Kong’s fixed income and money market ETF market constitutes a relatively small part of the local ETF industry and has struggled to achieve significant growth.
As of April, the 16 Hong Kong-listed fixed income and money market ETFs had a market capitalisation of HK$45bn ($5.8bn), representing 11.2 per cent of the ETF market, and had only 0.2 per cent of total market share in terms of average daily turnover.
In April 2019, the ten local fixed income and money market ETFs had a market capitalisation of HK$35bn representing 10.3 per cent of the market, and a 0.1 per cent market share in terms of turnover.
By comparison, some of the fastest-growing ETF sectors, including the Hong Kong equities ETF, have seen substantial growth recently. Its average daily trading volume shot up from 27 per cent of total ETF market share in April 2019 to 66.6 per cent this April.
“Investor appetite has been limited to a few products so far, due to the fact that most fixed income ETFs are expensive and lacking liquidity as compared to Ucits and US range products,” BlackRock said. The US manager has not listed any fixed income or money market ETFs on the local bourse.
HKEX has identified 29 fixed income and money market ETFs as eligible for fee waivers. If an ETF is available in more than one currency, the bourse counts it as one product.
Among them, Premia Partners has nine eligible products. It is followed by CSOP Asset Management, which has eight products. Of the 29 products, 15 are focused on China fixed income.
Melody He, Hong Kong-based head of business development, and product strategy and solutions at CSOP AM, conceded that the company was unlikely to see an instant uptick in flows from the new HKEX policy.
“ETF is more about [the] ecosystem so a single change is unlikely to see flows instantly,” He said.
But she added that the policy helped attract flows in the long run from more retail and high net-worth individuals.
CSOP AM’s four China-focused fixed income and money market funds have aggregated assets under management of HK$5.7bn, accounting for about 13 per cent of Hong Kong’s ETF fixed income and currency market, according to the company.
It said it planned to launch more fixed income products and would not only focus on the China market.
Rebecca Chua, Hong Kong-based founder of Premia Partners, said the fee waiver “may not seem very significant in absolute dollar terms” but added that they did translate into “direct savings for investors and market makers”.
“In the low-interest rate environment, any fee savings would become even more relevant,” she said.
Premia Partners has launched two China bond ETFs. The Premia China USD Property Bond ETF, which was launched in April and has assets under management of about HK$85m at the end of May, and the Premia China Treasury and Policy Bank Bond Long Duration ETF, which had AUM of HK$738m.
The low-yield environment and other competing products that could deliver higher yields are also obstacles to ETF issuers attracting investors’ attention.
“Given the vibrant [initial public offering] and stocks and warrants markets, fixed income ETFs have indeed occupied much less share of minds and wallets,” said Premia Partners’ Chua.
A further drag on effectiveness of the measure to waive fees is the fact that investors still have other fees to pay, for example, brokerage commissions.
One Hong Kong-based ETF veteran said that while the new rules were in general a “good move” for Hong Kong’s ETF market, institutional investors that have fixed income mandates in Asia “aren’t that comfortable” using ETFs.
It could be challenging for fixed income teams to study and use ETFs, which are “equities-like in nature”, especially for relatively small institutional investors, the veteran added.
Jackie Choy, Hong Kong-based head of ETF research for Asia at Morningstar, said that while a standalone policy might not be a “big thing” for the market, it could reduce “frictions” for investors, and could therefore encourage them to use the products and help improve the products’ liquidity.
*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at ignitesasia.com.