Institutional investors taking a short look at ETFs

Sovereigns and other asset owners in Asia are increasingly short-selling ETFs, say issuers.
Institutional investors taking a short look at ETFs

Asian investors are expected to boost short-selling activity of exchange-traded funds (ETFs), a trend that is welcomed by the biggest issuers in the region.

Institutional asset owners in Asia, including a number of sovereign wealth funds, are increasingly taking short positions in ETFs to carry out tactical positions on specific regions or countries, notes Ken Wong, equities product engineer at State Street Global Advisors (Asia), during a panel session at a conference in Hong Kong held by Data Explorers – a provider of securities financing data.

“Instead of hiring a traditional asset manager to invest in a certain strategy for a few months, the quickest and easiest way for them to get this type of exposure is through ETFs,” says Wong. “That’s why we have seen more and more Asian asset owner participation.”  

State Street has seen shorting interest in the Tracker Fund of Hong Kong from “institutional investors who might want to be neutral or have some type of exposure where they need to short [it]”, he adds.

ETF shorting is most prevalent in the US, where there were $34.9 billion in lendable ETF assets as of end-September this year, compared with the $923 million in Asia and $15.7 billion in Europe, according to Data Explorers statistics.

The low supply of lendable Asia ETFs has led to a securities lending fee of 101.5 basis points – nearly triple the 39.9bp in the US and close to matching Europe’s 147.77bp.

An indication of keen interest in the short-selling of Asian ETFs can also be seen in the utilisation rate – the proportion of lendable ETFs on loan – which at 25.48% nearly matches the US’s 30.15% and is far above Europe’s 3.2%.

ETF providers in general welcome short-selling of their products as it provides a means of liquidity and generates greater interest in ETF products overall – not least to institutional investors that are willing to take a sizable long position, encouraged by the fact that they may gain fees from lending the product to short-sellers.

Keith Chan, head of listed product sales in HSBC global markets, notes: “From an ETF [provider’s] point of view, we want participation in our products. We want more people to use them.”

However, hedge funds, which would seem to an obvious sector for ETF short-selling, have not yet caught on to the trend in Asia.

One of the reasons, says State Street’s Wong, is that the hedge fund community in Hong Kong and Singapore is comparatively smaller than that in the US and Europe. This makes for closer relationships with prime brokerages that are selling swaps and other derivative products at lower costs than ETF lending fees.

Another key factor is that not enough counterparties accept ETFs as collateral, notes David Hsu, director of iShares at BlackRock. ”It always comes down to the issue of liquidity. We always emphasise the fact that, in the secondary market, you can always get liquidity provided by participating dealers.”

He adds that the situation is gradually changing. “As more and more counterparties accept ETFs as general collateral, you’ll see more liquidity in the lending market of these products.”

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