Singapore Exchange (SGX) is to see its first leveraged and inverse (L&I) exchange-traded funds listed in 2017, as asset managers mull which underlyings to offer, said Luuk Strijers, head of equity and fixed income products at the bourse. 

This reflects a turnaround in sentiment. As Hong Kong’s markets regulator was, in May last year, about to approve its first L&I funds, AsianInvestor reported there was a lack of appetite from asset managers for listing in Singapore.

However, on the back of a recent pick-up in interest, Strijers said the first such funds would hit the market in the second half of the year. They had originally been expected to arrive in the second quarter of 2017.

“We are in talks with various issuers [about new products],” he told AsianInvestor, adding that the popular themes were high-yield and leveraged/inverse products.

Strijersm said the exact timescale of the launches would depend on the approval process, which also involves the Monetary Authority of Singapore (MAS), the local financial regulator.

The city-state’s L&I funds will have different underlyings from those available in other Asian markets, said Strijers, but he declined to elaborate further. 

A question of leverage

Singapore has floated the idea of allowing ETFs to provide three times leverage on the underlying index. This is more than is available on L&I funds in Hong Kong, where the limit is two times.

But MAS’s willingness to authorise three times leverage has yet to be tested. Strijers said: “We are talking about three times leverage, but I don’t think we can get it done [at the start]. Like Hong Kong, we will allow two times [leverage] to begin with.”

There are concerns among regulators and wealth managers that retail investors may not fully understand how L&I products should be used. They feel that more education and experience is needed to avoid big losses that could lead to a backlash from the market.

The MAS guidance document on L&I fund listings states: “To facilitate better understanding of such products by investors, the authority expects fund managers to adopt a phased approach in developing and offering such products to investors.”

MAS does not rule out funds with more than two times leverage, but says: “A fund manager should consult the authority if it intends to offer an L/I Product that exhibits more novel characteristics or provides a high leverage factor, such as one that targets a return of three times or more of the returns of the underlying index on a daily basis.”

Strijers said Singapore fund promoters were not actively pushing for three times leverage, but they understood that products that do well were those not listed elsewhere.

Hong Kong’s first L&I ETFs linked to local Hang Seng Indices launched in March this year, and some have already racked up strong trading volumes. However, the big variation in turnover between products has raised questions over the source of demand.

Meanwhile, just three new ETFs have listed in Singapore in the last nine months, two linked to Asian real estate investment trusts (Reits) – from Phillip Funds and Nikko Asset Management, in association with local Reit investor Straits Trading. The third is the Asean Select Dividend Index fund from Thai promoter One Asset Management, the first ETF listed on a cross-border basis under the Asean fund passporting framework. 

The Nikko Asia ex-Japan Reit, launched on 29 March, had already attracted S$60 million ($43.4 million) in AUM as of the end of April. Phillip’s Apac Dividend Leaders Reit ETF, launched in October, had S$32 million and the One Asset Management ETF, listed on April 5, had S$23 million as of the end of May, according to SGX.