Thumbs-up for impending ETF Connect changes as bigger pool of choices, funds beckon investors
- China’s CSRC will relax the eligibility criteria for the ETF Connect scheme, potentially doubling the pool of choices for stock investors
- Global fund managers welcome the measures, while also calling for further steps to include other asset classes
The measures, which lower the thresholds on size and portfolio constituents for the ETF Connect scheme, are likely to double the pool of ETFs tracking equity benchmarks in both financial markets, where trading volume has increased in recent months.
“The improvements are a step in the right direction to ensure its success going forward,” Tom Digby, head of ETF business development and capital markets for Asia-Pacific at Invesco, said at a conference hosted by the Hong Kong Investment Funds Association (HKIFA) on Thursday.
An ETF is an investment vehicle that works like a combination of mutual funds and stocks, typically tracking major indices by mirroring their components. Individual investors who buy and sell the ETFs are effectively buying stocks represented in the target index.
The China Securities Regulatory Commission (CSRC) last week unveiled five measures to help halt a market slump and revive confidence in the nation’s capital markets. The decision to tweak the ETF Connect eligibility criteria came following China’s market intervention when state-run funds pumped billions into the ETF vehicles to lift stock prices.
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The CSRC will slash the minimum assets under management to HK$550 million (US$70 million) from HK$1.7 billion. ETF managers will be allowed to hold 60 per cent of their assets in Hong Kong or mainland-listed stocks, versus 90 per cent currently.
The changes will be implemented by around midyear, according to Hong Kong Exchanges and Clearing, the city’s stock market operator.
About 78 mainland-listed ETFs with combined assets at 85.2 billion yuan (US$11.8 billion/HK$92 billion) and eight Hong Kong-listed ETFs with HK$25.5 billion of assets could join the ETF Connect scheme after the changes, according to an estimate published by China International Capital Corp on Monday.
Hong Kong investors gain access to US$89.6 billion in China-based ETFs
Investors can trade 83 mainland-listed ETFs and four Hong Kong-listed ETFs via the ETF Connect scheme, which was launched in July 2022, according to exchange data.
“We have seen more capital flowing into our Hong Kong-listed ETFs,” said Andy Ng, head of iShares equity product strategy solutions at BlackRock, the world’s biggest money manager. “We are very encouraged to see the latest changes” to bring more choices for investors, he added during the panel discussion.
Average daily turnover of ETFs rose 8 per cent to HK$13.3 billion in Hong Kong in the first quarter from a year earlier, the stock exchange reported this week. Seven new ETF products were launched in the quarter, it said.
In contrast, stock turnover slumped 22 per cent to HK$99.4 billion per day over the same period, while funds raised from first-time stock offerings tumbled 29 per cent to US$604.4 million.
Rahul Bhalla, head of Asia ETF distribution at Franklin Templeton, said investor education is crucial to promote ETFs to a wider group of participants.
The fund-management industry should clamour for easier rules and regulations within the ETF Connect scheme, said Alex Chiu, senior strategist of ETF Business at Value Partners. It would be helpful if the scheme could include ETFs that invest in overseas markets or other asset classes such as bonds, he added.
