Adoption of exchange-traded funds (ETFs) is set to rise over the next 12 months among investors from Greater China, a new survey has found, as the Hong Kong Stock Exchange devise fee waivers and cross-listings with the Shanghai bourse to draw capital.
Thematic, cryptocurrency and sustainable ETF strategies in particular have generated interest from mainland China, Hong Kong and Taiwan investors, according to the 2021 Greater China ETF Investor Survey by private investment bank Brown Brothers Harriman.
The survey, published on Wednesday (June 9), collected responses from more than 300 institutional investors globally, of which 146 investors were from mainland China, Hong Kong and Taiwan. The Greater China respondents were made up of 58% institutional investors, 20% financial advisers, and 22% fund managers.
More than half (56%) of them said they have at least 25% of their portfolio invested in ETFs and 76% plan to increase their exposure to ETFs in the next 12 months.
“ETF adoption and usage are at varying stages across Greater China,” the report wrote. While 58% of Taiwanese investors and 66% of Hong Kong investors said they plan to increase their use of ETFs over the next year, the number was much higher on the mainland, where 92% of respondents plan to do the same.
Mainland Chinese and Taiwanese investors ranked ESG as the top strategy they wanted to see more of in the market, while Hong Kong investors preferred to see more thematic ETFs, which include technology, robotics and artificial intelligence, health care and fintech themes.
Cryptocurrency was unanimously chosen as the second most popular ETF strategy, and Taiwan showed a preference for actively managed ETFs.
In terms of underlying asset classes, Asia Pacific equity ETFs had strong inflows, but the Hong Kong Stock Exchange (HKEX) has been trying to boost fixed income and money market ETFs.
In the first quarter this year, flows into Asia-Pacific equity ETFs reached $19.3 billion, almost double the amount ($9.9 billion) for the equivalent period in 2020, according to research house ETFGI.
On May 31, Hong Kong Exchange introduced two new fee waivers for Hong Kong-listed fixed income ETFs and money market ETFs. As of May 28, there are 29 fixed income and money market ETF trading counters eligible for the fee waivers.
However, compared with equity ETFs, fixed income ETFs still have a long way to go, particularly with investor education, Chris Pigott, senior vice president and head of ETFs for Asia at BBH, told AsianInvestor, adding that higher liquidity, transparency and cost-efficiencies are still providing ETF products with strong support.
But he noted that fixed income ETFs have advantages. “It can be challenging for investors to directly access the bond market due to minimum trading sizes or other challenges, while accessing through an ETF can be a much more efficient option," he said.
As home to one of the most active stock exchanges, Hong Kong has also launched many initiatives to foster higher participation and lower cost in the ETF market, especially for fixed-income ETF products.
“The latest fee waiver initiative is another step in enhancing the infrastructure in the Hong Kong ETF market, but it is too early to tell if this will directly translate to the growth of fixed income ETFs,” according to Pigott.
Brian Roberts, HKEX’s head of exchange traded products, told AsianInvestor that institutional investors have been showing growing interests in such assets, and the fixed-income ETFs products are set to attract higher new flow.
“In relation to the adoption of ETFs overall, the market is growing rapidly given a number of investors are increasing their exposure on ETF assets, especially coming from institutional investors,” Roberts said.
“In general, the adoption curve of ETFs starts with equities and then moves toward fixed income products and other investment strategies. In terms of adoption, the US and Europe market are a few years ahead of Asia but we are observing accelerating adoption across both institutions and individual investors,” he added.
As of end-May, there are over 148 Hong Kong-listed ETFs in total with assets under management at HK$416 billion. Among which, 11% of the AUM were from fixed-income and money market ETFs (the rest are from equity ETFs and commodity ETFs which account for 88% and 1% respectively) as of end-May.
For the first month this year, HKEX’s ETF average daily turnover has gone up to HK$7.8 billion, representing a steady growth on a yearly basis.
Global investors continued increasing allocations to the mainland equity and bond markets last year and indicated they will continue to do so.
According to the survey, 86% of global respondents planned to increase their allocations to the China equity and bond markets in 2021 and the majority (ranging from 34% to 46% depending on the market) expect to use ETFs to facilitate their investment.
As regulators open up restrictions to allow the inclusion of ETFs products in cross-trading between mainland China and Hong Kong, Roberts believes that there will be more room for ETF product development in the foreseeable future.
On June 1, HKEX also announced its first-ever ETF listings in Hong Kong and Shanghai under the new Hong Kong-Mainland ETF Cross-listing Scheme announced in 2020.
The newly cross-listed ETF was CSOP Huatai-PineBridge CSI Photovoltaic Industry ETF which invests 90% or more of its total net assets in an ETF approved by the China Securities Regulatory Commission and currently listed on the Shanghai Stock Exchange.
Pigott also highlighted that as cross-border investment access continues to expand, there is optimism that ETFs will be added to the Stock Connect programme. New channels for cross-border ETFs should increase the number of available products and be a catalyst for expanding the use of ETFs in the region.
This article has been edited with an update to Chris Pigott's title.