Video: What are the market dynamics for the Greater China ETF market?
Greater China is seeing great potential in exchange-traded funds (ETFs) market, with increasingly more institutional investors looking to hold more ETFs
Video Production: Ho Yee Wong
ETFs have become one of the major investment vehicles with a market size of US$5.1 trillion globally, according to Brown Brothers Harriman. Asian investors, in particular, are very active in trading ETFs and the market is expected to grow even bigger.
As of 2018, 88% of Asian institutional investors are investing in ETFs, according to the Asia ETF Survey 2018 by HKEX.
The Greater China ETF market, which currently accounts for only 2.1% of the global market, is expected to further grow as the majority of the institutional investors are planning to increase their holdings in ETFs.
According to a recent survey on ETF by Brown Brothers Harriman, in 2019, 63% of the Greater China institutional investors expect the use of ETFs to increase, whereas the number was 56% in the previous year.
The increase is especially significant in mainland China. In 2019, 77% of the institutional investors in the market expect to increase ETF holdings, up 79% compared to the previous year.
Hong Kong is also being considered by these investors when it comes to investing in ETFs. Although the heated discussion around ETF Connect that will link Hong Kong with mainland China in trading ETFs has cooled down a bit as the roll-out of the scheme has been shelved temporarily due to technical issues, the market is still keeping an eye on any updates.
Since the Stock Connect’s launch in 2016, the regulators have committed to including ETFs in this scheme. HKEX chief executive Charles Li said in March this year that the Connect will roll out as soon as possible and the regulators from the two sides have been negotiating on this the launching schedule.
Indeed, Hong Kong, being the Asian hub of ETFs, has been gaining traction among institutional investors. According to the HKEX survey, in 2018, 51% of the respondents chose Hong Kong as a preferred overseas destination for ETF investments.
For mainland Chinese investors, cross-listing is one of their preferences when accessing Hong Kong ETFs. According to Brown Brothers Harriman’s survey in 2019, half of the respondents said they would buy ETFs that are cross-listed on the Shanghai Stock Exchange through the Mutual Recognition of Funds (MRF) scheme. And 40% of the respondents say they will use the Connect program when it is available in the future.
Furthermore, there are certain aspects that institutional investors care about when it comes to choosing the right ETF products. Expense ratio (51%) and tracking error or tracking difference (51%) rank at the top among Asian investors’ prime considerations in selecting ETFs, according to the HKEX survey.
Expense ratio is among Hong Kong institutional investors’ top three criteria in terms of importance for the past two consecutive years, according to Brown Brothers Harriman’s ETF survey. It also used to be among the top five important criteria for mainland China and Taiwan investors in 2018 but is no longer ranked so highly this year.
This year, historical performance has become the major theme - it is ranked as one of the top three important criteria across the Greater China market. In addition, index methodology is another major concern for mainland China and Taiwan markets.
Another theme that is gaining traction in the Greater China ETF market is ESG investing or socially responsible investing. Although there are not many ESG ETFs available in the Greater China market, mainland China and Taiwan institutional investors have ranked ESG ETFs as one of their top two choices that they are expecting to see more of in their local market, according to Brown Brothers Harriman’s survey.
Hong Kong’s institutional investors rank ESG ETFs as their fifth choice. However, the market’s awareness of ESG has not lagged. Fifty-eight percent of Brown Brothers Harriman’s survey respondents plan to utilize ESG or sustainable investing in 2018.