The inclusion of China A-Shares in major indexes is having an effect on the Hong Kong ETF industry, with ETF issuers providing new products to capture the change.
ETF sponsors in Hong Kong are increasingly rolling out China-focused products, in a bid to capitalise on growing investor appetite for Mainland onshore assets.
Over the past few months, many "inclusion" and "technology" themed, China-related ETFs have launched on the Hong Kong Stock Exchange, such as the ChinaAMC MSCI China A Inclusion ETF (83197) and the Samsung CSI China Dragon Internet ETF (2812).
A-shares and mainland fixed income securities inclusion into the international benchmark indexes appears to be one of the key drivers for the ETF providers to create the products that allow foreign investors in Hong Kong to gain exposure to A Shares market.
Index provider MSCI included 233 A-Share large caps into its flagship MSCI China Index, MSCI Emerging Markets Index, and the MSCI ACWI Index in June.
The move is expected to spur demand for A-Shares, particularly as ETF managers are seeking to rebalance their portfolios to track the underlying indexes.
International investors' Chinese equity holdings are currently significantly under positioned, such that foreign ownership in A-Share market is still in the low single digits.
That said, Hong Kong Monetary Authority previously estimated that the MSCI inclusion is likely to divert as much as US$300 billion into A-Share market from passive managers alone over the next few years.
ChinaAMC MSCI China A Inclusion ETF, which was launched by China Asset Management (Hong Kong) in February, is the city's first ETF tracking the A-shares being included into the MSCI indexes.
Frederick Chu, head of ETF at China AMC (HK), said the ETF has drawn positive market response thus far.
"The ETF is one of the most actively traded ETF in Hong Kong among all. We see both institutional and retail investors aggressively positioned their allocation strategies [after the inclusion]," he said.
Indeed, China AMC (HK) is stepping up to diversify its China ETF product suite with the launch of the ChinaAMC Bloomberg Barclays China Treasury + Policy Bank Bond Index ETF four months after the listing of its MSCI inclusion ETF.
The ETF is designed to track the performance of fixed rate RMB-denominated treasury bonds and policy bank bonds.
China Treasury ETF is the company's first fixed income ETF. Looking forward, "the focus of our new ETFs over the next two years will be on the connection and inclusion between the China and Hong Kong," Mr Chu says.
Apart from the inclusion themed and fixed income ETFs, sector ETF is another focal point for local ETF players.
Samsung Asset Management (HK), the Hong Kong-based subsidiary of Korean manager Samsung Asset Management, launched the first ETF tracking Chinese large-cap internet companies listed in the Mainland and overseas on June 20.
The Samsung CSI China Dragon Internet ETF (2812) is designed to mimic the performance of the CSI Global China Internet Index, a benchmark for large-cap Chinese internet stocks.
Although there have already been two other similar ETFs in Hong Kong, Joanne Siu, Samsung (HK)'s ETF sales director, plays down the overlapping.
"The two counterparts only track Hong Kong and US-listed Chinese internet companies, but our new ETF can provide access to A-Shares," she says.
However, Hong Kong's ETF market seems to be overcrowded with China-centric and Hong Kong-centric products. Market players need to put more effort on innovative products and investment themes to stand out from their rivals.
In the face of the market competition, Ms Siu admits Samsung (HK) will need to focus more on alternative ETFs to differentiate its products from plain vanilla ETFs.
According to the figures from the HKEX, market capitalisation of Hong Kong-listed ETFs and leveraged and inverse products was about HK$342.8 billion (US$43.9 billion) at the end of April.
