The first batch of ETFs listed in Hong Kong under the renminbi-denominated QFII programme has suffered its first month of collective net outflows since inception.

The universe consists of four physically backed A-share ETFs listed between July and October last year, of which three saw redemptions totaling $130 million in February.

It represents a landmark setback for the segment, with the quartet having attracted net inflows of $6.4 billion within the last half of 2012, finds research house Cerulli Associates.

By further contrast, in February the 37 China-focused (non-RQFII) ETFs domiciled outside China recorded a combined inflow of $185 million.

Cerulli questions whether future ETFs launched under the RQFII scheme will be able to achieve their fundraising goals, given that more quota will be released soon after announcement of an Rmb200 billion expansion of the RQFII programme, as reported.

Relatively attractive rates on renminbi time deposits in Hong Kong – 2.3% for three months on Rmb20,000 – could part explain February’s outflow. “Negative monthly returns [on index] may not be an enticement to enter ETFs,” notes Cerulli.

February’s outflows were led by the Harvest MSCI China A Index, which shed $93 million, and the E Fund CSI 100 A-Share Index, which lost $41.3 million. Also in the red was the China AMC CSI300, although negligibly.

The CSOP FTSE China A50 ETF – the fundraising leader with $2.4 billion by the end of December – was the only one of the four to record net inflow, albeit slight.

Cerulli points out that the CSOP A50 ETF’s expense ratio of 1.15% – the highest among the four issuers – has evidently not been a deterrent to investors, suggesting that more focused ETFs fare better. “Future RQFII ETFs could have underlying indices that are more sector-focused, for example,” writes Cerulli in its report.

On the question of whether future RQFII ETFs will be as successful at fundraising as the initial batch of four, Cerulli says it will depend on various factors, including which indices they track, the market from which they raise assets (RQFII is open to investors worldwide) and whether authorities put their weight behind the next batch.

The research house suggests that future RQFII ETFs in Hong Kong are likely to try and differentiate themselves by tracking specific sectors or commodities.

“Product differentiation is a good thing, but unfortunately our research shows that only broad-based ETFs – and usually the first ones out to market – grow to a substantial size,” says Cerulli director Bee Ong.

CSOP is thinking of diversifying into ETFs with beta exposure and tailor-made index products focusing on dividend yield or sector exposure, Cerulli adds.

The renminbi-denominated foreign institutional investor (RQFII) programme was launched in December 2011 to allow the Hong Kong subsidiaries of mainland fund managers to invest back into the onshore securities market.

An initial quota of Rmb20 billion was permitted, with regulations stipulating that no more than 20% would be invested in equity and no less than 80% in fixed income.

That was expanded in April last year by Rmb50 billion, with RQFII permit holders allowed to deploy their quotas into exchange-traded funds.

At present, the four RQFII ETFs in Hong Kong have a combined AUM of Rmb46.6 billion as at the end of February, exceeding their combined quota of Rmb43 billion.