At least 26 exchange-traded funds are due to delist in Hong Kong in the coming months, signalling the biggest ETF shakeout in the city for at least three years and reflecting ever-fiercer competition and cost pressures.
US-based BlackRock and Hong Kong’s Enhanced Investment Products (EIP) are among those shutting funds down. The former is set to terminate seven ETFs on February 24 and the latter closed seven on December 29.
The BlackRock products include five synthetic ETFs that track the CSI A-share sector indices and one that tracks the dim sum bond index.
EIP closed all of the emerging single-country ETFs in its Xie Shares range. Chief executive Tobias Bland cited low assets under management and high operating costs. He told AsianInvestor: “It was a purely commercial decision, all about the cost of running the funds.” He also feels it should be easier to list and delist products in Hong Kong.
The funds in question were Xie Shares India (tracking the Nifty 50), Indonesia (LQ45), Korea (Kospi 200), Malaysia (FTSE Bursa KLCI), Philippines (PSEi), Taiwan (Taiex) and Thailand (Set 50).
They were launched in 2012 but have never exceeded $100 million in aggregate, which is often cited as the level of AUM an ETF needs to reach to be profitable.
It has become extremely expensive to run these type of funds, noted Bland, because of ancillary charges made by Hong Kong's Central Clearing and Settlement System, data provider Markit for reconciliation and other providers that fund houses must utilise under the SFC rules.
He put the cost of running each ETF at $20,000 to $25,000 a month. With passive funds, managers need high volumes to compensate for their low fees relative to active mutual funds. The management fee on the Xie Shares ETFs was 0.39%.
There was a statutory posting on the company’s website and investors were notified before the closure. Those that didn’t sell before then were redeemed at NAV on the final trading day.
Other firms to have delisted multiple ETFs in the past include Lyxor, which closed all 12 of its Hong Kong-listed ETFs in late 2011, as first reported by AsianInvestor. The French fund house’s exit from that market foreshadowed an industry shakeout in Asia that had been widely tipped. It was followed in 2014 by HSBC, which terminated all four of its Hong Kong-listed ETFs.
It is not an easy process to take a listed fund off the market, noted Bland. “We had a prolonged discussion with the SFC [Securities and Futures Commission]. It took us three or four months to close and cost us another $100,000 in legal fees.”
ETFs as a product type are “Darwinian” – that is, the strongest survive – so it should be simple to list and de-list and leave the winners standing, he said.
“The SFC, quite rightly, wants to have healthy products on the exchange; product that’s growing and has appeal to investors,” noted Bland. “They don’t want products that are static and not viable.”
He said of EIP’s experience of launching ETFs: “It’s like driving up [a motorway] before it’s built. We’ve been a pioneer in this area and one of the lessons we’ve learnt is you definitely want to issue product which is either in vogue or where there’s an immediate demand.”
But with that demand comes the need to issue ETFs quickly, so the time it takes to list in Hong Kong is another frustration for Bland. Three months is the typical time frame, which is “quite a deterrent to being able to list timely product”, he said.
Bland did not think the experience would affect EIP’s ability to introduce new funds in the future. The group introduced a Gold Miners ETF in December.
EIP has three remaining ETF funds in the Xie Shares range: CLSA Gary (growth at a reasonable yield), Gold Miners and Chimerica ETFs. These products have around $50 million in AUM between them.
Competition in the ETF space has intensified as a result of fee-cutting. Last month, Hong Kong-based Value Partners cut the management fee on its Gold ETF to zero. The move was indicative of the drastic measures fund groups are taking to secure market share.
As Bland put it: “You either enter into a very vanilla price war [over commoditised funds] or you come out with clever product.” He cited an ETF that covers robotic stocks in the US [called Robo, issued by Robo Global] with $1.4 billion under management, which it raised in just three months.
However, Asia, which represents 4% of global ETF assets, remains largely an institutional market for ETFs, with gold and factor-based strategies the most popular products in the last year, said Deborah Fuhr, principal director at London-based data provider ETFGI.
In the short term, the regional retail market faces the hurdle that ETFs don’t pay retrocessions to distributors. Bland has criticised the commission-based advice culture that is dominant in Hong Kong, which means there is no incentive for advisers to sell ETFs.
However, some argue the evolution of discretionary accounts and wrap platforms could result in more use of ETFs, as private clients became more fee-conscious. And Hong Kong’s move to a new low-cost default fund for MPF savers this year could also boost the awareness of low-fee passive options.