State Street Global Advisors says it expects to deliver a fresh basket of Asia-focused exchange-traded funds (ETFs) after launching a Greater China ETF listed in Hong Kong.
Its latest fund – the SPDR FTSE Greater China ETF – saw 861,400 shares change hands during its trading debut on the Hong Kong stock exchange yesterday, for a total volume of HK$21.4 million ($2.7 million).
State Street executives, who joined regulators at the launch, declared themselves happy with this initial showing. Yet the debut represents a fraction of the volume of the largest ETFs listed in Asia.
The most-popular product, the iShares FTSE/Xinhua A50 China Index ETF, has an average daily trading volume of $144 million, according to BlackRock. The Tracker Fund averages daily volume of $22.2 million.
State Street says it expects the volume to build gradually as retail and particularly institutional investors hear about the product.
The new fund tracks the newly created FTSE Greater China HKD Index, which covers large- and mid-cap stocks in Hong Kong, Taiwan and China, including H-shares, red-chips and B-shares.
The product is structured as an umbrella trust, featuring a ‘master prospectus’ approved by Hong Kong’s Securities and Futures Commission. This will enable the firm to roll out additional ETFs using the same core structure and outlining the features of any new product in an add-on filing.
“We did it with an umbrella, so hopefully it will be easier to add other products,” says Kelly Driscoll, SSgA’s senior managing director for Asia ex-Japan. “Our plan is to start producing several [new ETFs] a year under our structure in Hong Kong. And we’d be looking, in addition to newly created products, to bring in cross-listed ETFs.”
Any new products are likely to be ETFs based on Asia-focused indices, since investors often like to put their money to work near to home. Cross-listings would likely include markets outside Asia.
State Street launched the first ETF in Hong Kong in 1999 with the Tracker Fund of Hong Kong. It also introduced the first ETF in Singapore, the streetTracks Straits Times Index ETF, as well as the first Asian bond ETF, the ABS Pan Asia Bond Index Fund, listed in Hong Kong in 2005.
But there has been a long gap in between new products. State Street listed the SPDR Gold Trust in Hong Kong in 2008, but that was a cross-listing for a product that already existed in the US.
Although the new ETF is being marketed as offering diversified exposure to Greater China, it is heavily concentrated in Hong Kong shares. It does not hold any A-shares – open only to domestic investors in China – and has only around 1% of assets in B-shares – stocks listed in Shenzhen and Shanghai that are open to overseas investors.
That means the rest of its 40.4% exposure to Chinese shares comes in Hong Kong, through H-shares and red-chips – Chinese companies listed in Hong Kong. It also places 32.0% of assets in Hong Kong-based companies, meaning that around 70% of its assets are in Hong Kong listings, with the remaining 27.6% in Taiwanese shares.
But Jim Ross, senior managing director of the intermediary business group at State Street, rubbishes the suggestion that the new ETF duplicates much of the Tracker Fund, which invests in the Hang Seng Index and is broadly intended to reflect the moves of the Hong Kong market.
“This index is 353 stocks, so it gets a significantly broader diversification than the Tracker Fund,” he notes.
The Tracker Fund holds the 45 components of the Hang Seng Index. State Street says its latest fund is intended as a complimentary product, rather than one that competes with the Tracker Fund.
All of State Street’s ETF products replicate the indices they are designed to match, holding all or a representative portion of the underlying shares, and do not hold derivatives such as swaps or notes.
That explains the small holdings in mainland Chinese listings, which are hard for asset managers to access directly – but it may have helped the approval of the new product at a time when regulators are scrutinising derivative products in Hong Kong and elsewhere.
Still, State Street filed to register the new product in January and initially wanted to launch the product in June, only to see the launch delayed. “It took a little longer than we expected with the regulators,” Driscoll admits. “I don’t think they slowed it down, but I do think they are being very careful and cautious.”