Vanguard, which manages $2.4 trillion in assets, is set to list its first Hong Kong-domiciled exchange-traded fund, which will track the FTSE Asia ex Japan Index.
The ETF was authorised by the city's Securities and Futures Commission (SFC) on April 24, but Shelly Painter, Vanguard's Asia managing director, declined to say when it would officially launch.
There are a number of advantages to domiciling funds in Hong Kong, one being potentially swifter access to Chinese retail markets, following the SFC's announcement of the proposed China-Hong Kong mutual recognition scheme. Another benefit is that firms do not have to comply with European regulations.
The new product continues the trend for Vanguard to use FTSE as an index provider for some of its funds, following a move last year to drop MSCI for six international equity index funds, chiefly for reasons of price.
Vanguard, which has had an institutional presence in Hong Kong since 2010, received authorisation from the SFC to deal and advise in securities in February 2012. It has since hired over 12 employees in the city to serve the retail investors through intermediaries, and now has 24 sales and marketing staff in Hong Kong, who report to Painter.
Vanguard is in the process of approaching local investors. “We’ve been in the market from an institutional perspective for some time," says Painter. "So we’ve spent the past couple of years studying the retail market and intermediary market and hoped we could make some headway there."
“For us, it’s a bit of a challenge. We don’t pay for distribution. We thought long and hard [about] how to reach end investors.
“[Now] the doors are open and we’re going on lots and lots of meetings,” adds Painter. “The next step is hopefully [to] offer products retail investors are interested in.”
She declines to comment specifically on likely funds or the strategies.
Certainly other ETF providers have not found it an easy task building up scale in Asia's fragmented markets, as the exit of firms such as Lyxor and the large number of products with minimal volumes demonstrates. One differentiator Vanguard has to offer has been is relatively low ETF costs; for the new product, the total expense ratio is 0.38%, according to the prospectus.
The phyisically-backed Vanguard FTSE Asia ex-Japan Index ETF will invest in equities.