ChinaAMC partners US firm on landmark L&I ETFs

The overseas arm of China Asset Management is listing its first leveraged and inverse ETFs in Hong Kong, which will track the Nasdaq 100. It has partnered with US fund house Direxion.
ChinaAMC partners US firm on landmark L&I ETFs

China Asset Management (HK) has teamed up with US-based Direxion to launch its first leveraged and inverse (L&I) exchange-traded funds and the first such products in Hong Kong to track the US's tech-heavy Nasdaq 100 index. They will list on the city’s bourse today. 

The two funds – the Nasdaq 100 Daily (2x) leveraged and Nasdaq 100 Daily (-1) inverse – received regulatory approval on September 21. The first firms to launch L&I products were Samsung Asset Management in June and CSOP Asset Management in July.

The Nasdaq 100 has had a particularly strong last three months, rising 14.7%, though it is only up 7% year-to-date. It has gained 125% over the past five years.

ChinaAMC chose to partner ETF provider Direxion, which offers 77 L&I products in the US, rather setting up an L&I product team in Hong Kong, as CSOP and Samsung have done.

Asked whether ChinaAMC would set up its own L&I team in Hong Kong, Vincent Chen, head of the ETF business at ChinaAMC (HK), was non-committal. 

He said the firm's ETF team had specialists in futures and derivatives investing, but that for US equity products it made sense for to Direxion to conduct daily rebalancing at the US market close. (Hong Kong's Securities and Futures Commission (SFC) requires fund managers or their investment advisers to have experience in futures-based products.)

Other products planned

Direxion acts as investment adviser for the two products, and the two firms have other L&I funds in the pipeline in anticipation of the rules being relaxed further.

The SFC does not yet allow L&I products tracking China or Hong Kong indices. The initial products from CSOP and Samsung were focused on other Asian equity markets, as providers argued that European- or US-focused funds would be harder to manage due to the short-term trading nature of L&I ETFs.

However, Chen said this was not an issue, noting that the products’ underlyings were Nasdaq 100 index futures, which trade actively in Asia time.

Chen expects the new funds to attract both institutional and individual investors, who will use them to gain low-level leverage or short-sell without needing financial margin or collateral.

US-focused products have gained traction elsewhere in Asia. Yuanta Securities Investment Trust Company (SITC), Taiwan’s largest ETF provider, launched a batch of L&I products tracking the US's S&P500 index in December. The daily inverse (-1) product has NT$3.78 billion ($121 million) in assets under management, versus NT$222 million for the leveraged version, as of yesterday.

Lingering concerns

Despite the success of L&I products in Korea and Taiwan, some wealth managers are cautious about such derivatives-based products, because they feel investors may not fully understand how they work. 

Stewart Aldcroft, senior fund industry adviser at Citi in Hong Kong, stressed L&I products were short-term trading vehicles. “They will require an entirely different skill set from traditional exchange-traded funds and mutual funds, which usually cater for medium- to long-term investment,” he said in an email to AsianInvestor.

Aldcroft said a lot of the interest in L&I products in Korea and Taiwan came from fund managers using them for short-term trading purposes.

Local asset managers are the biggest holders of the two largest L&I ETFs in Taiwan – namely, Fubon SSE180 (2X) and Yuanta CSI 300 Daily Bull (2X). The likes of Fuh-hwa SITC, Jin Sun SITC and KGI SITC use such products in their active China equity portfolios, according to Bloomberg. 

¬ Haymarket Media Limited. All rights reserved.