Commerzbank has been building a market-making business in commodity and equity exchange-traded funds in Hong Kong.
Gold ETFs are one new area of focus for the German firm in the region, thanks to its capabilities in spot and futures gold trading. Wide spreads in gold ETF pricing show there are opportunities for those able to hedge efficiently in this market, says Thorsten Heidt, Asia head of equity markets and commodities.
Spreads on the Hong Kong-listed SPDR Gold Trust, the world's largest gold ETF by assets, stood at 0.1%, based on a bid/offer of HK$1,029/HK$1,030 at Monday's market close. The Singapore-listed fund was quoted at S$132.61/S$132.75, a spread of 0.14%.
Heidt did not say how much his team expects gold ETF spreads to contract further, but notes he has seen them narrow significantly since Commerzbank started market-making for the Hong Kong-listed SPDR Gold Trust.
“We are not here to act as just another broker to trade ETFs on-screen,” Heidt tells AsianInvestor. "Our business case is to provide risk pricing to Asian clients who trade US- or Europe-listed ETFs when their markets are closed during Asian trading hours."
Having won the appropriate licenses to market-make in Hong Kong in May, Commerzbank now quotes on 10 ETFs. Other than the SPDR Gold Trust, these are mainly China-related and include the iShares FTSE China A50 tracker and products managed by mainland firms in Hong Kong.
Providing liquidity on gold ETFs in Hong Kong, and trading spot gold and gold futures in Singapore, will allow Commerzbank to hedge positions more effectively than many of its peers, says Heidt.
“We have a trading desk in Singapore that trades physical gold and gold futures. So once our Hong Kong ETF market-making desk trades a gold ETF order, we can hedge the positions in both the spot and futures markets,” he says. “By combining the two sources of liquidity, we can ensure that the client has the right price.”
Investors have made significant redemptions from gold ETFs, with the metal suffering a 21% drop in price year-to-date. The Singapore-listed SPDR Gold Trust's AUM fell to S$1.18 billion ($930 million) as of June 30 from $1.48 billion in July last year. It was the most traded ETF on SGX this year, with S$730.5 million in average daily volume in the first half.
Meanwhile, Heidt says Commerzbank has seen demand for fixed income ETFs listed in Asia. This is despite recent lacklustre interest in the asset class in the US, where bond ETFs registered almost zero inflows year-to-date.