[This article originally appeared on our sister site, IndexUniverse.eu.]
With the summer lull setting in, August was a relatively quiet month for ETF developments in Asia, but Korea’s Hanwha Asset Management did its best to keep new launches ticking over. The firm listed seven sector and style products, all based on indices from local financial information provider FnGuide.
The sectors ETFs covered the auto, shipbuilding and transportation, iron and metal and chemical industries, while the style products included a high dividend index, a defensive index based on lower volatility stocks and a Market Leader index of firms with dominant positions in their industries. All carry a total expense ratio of 0.23 percent, in line with Korean providers’ trend towards ever more competitive pricing.
These launches took the total number of locally-listed ETFs to 129, as the Korea Exchange cemented its position as one of the few Asian markets that has achieved significant scale in ETF trading. In the last week of August, Korea accounted for around 48 percent of regional ETF turnover by value, according to Deutsche Bank data, despite only accounting for around 10 percent of regional ETF assets.
Korea’s high trading volumes reflect its famously trading-orientated culture, populated by retail buyers with a fondness for derivatives and leverage. This puts it in sharp contrast to Japan—until recently clearly Asia’s broadest ETF market—which has almost exactly the same number of listed product at present (131), but a very different industry structure. In Japan, institutional users dominate and local funds account for around 40 percent of the region’s total ETF assets under management, but just 9 percent of volume.
What’s more, the flow of new listings in Japan has almost dried up this year. A single listing from Mitsubishi UFJ Asset Management this month was the first new ETF on the Tokyo Stock Exchange since early April. The Maxis Topix Risk Control (10 percent) ETF aims to limit volatility of the fund to a maximum of 10 percent, by adjusting its allocation between cash and Japanese equities in response to recent trends in market volatility. While potentially of interest to some institutional investors, such a product seems likely to see limited uptake—a related product with a 5 percent volatility cap has less than US$5 million in assets several months after launch.
There has been some innovation in Japanese ETFs in 2012, including the first inverse and leveraged products earlier this year, but overall the industry is looking increasingly stagnant. Unless measures such as the forthcoming merger of the Tokyo and Osaka exchanges can boost volumes and draw investors back, what was once Asia’s most promising ETF market could rapidly be eclipsed by its nearest neighbour.
Two More RQFII ETFs In Hong Kong
While Korea is the fast-growing market, China and Hong Kong remain the hotspot for product innovation. The main story this month was the launch of two more vehicles under the Renminbi Qualified Foreign Institution Investor (RQFII) scheme, following the appearance of China AMC’s CSI300 ETF in July.
These were a CSI100 tracker from E Fund Management and a FTSE China A50 fund from CSOP; these two indices represent the 100 and 50 largest stocks, respectively, from the Shanghai and Shenzhen exchanges. In line with China AMC’s product, the estimated TER for both is 0.99 percent. Meanwhile, Harvest Global Investments is still finalizing a MSCI China A ETF, which should make it to market in the near future.
RQFII ETFs are the first offshore ETFs that invest directly in mainland Chinese A shares and are expected to challenge existing A share products that use derivatives to gain exposure. Whether their advantages—physical asset ownership, greater flexibility and potentially lower costs—can overcome the established high liquidity of the dominant iShares FTSE China A50 tracker or BOCI-Prudential’s WISE CSI300 tracker is still too early to tell, but flows suggest they have got off to a good start.
So far, China AMC was granted a RMB5 billion foreign exchange quota for its ETF, of which RMB3.8 billion has been used, E Fund was granted RMB2 billion, of which RMB1.9 billion has been used, and CSOP was granted RMB5 billion, of which RMB4.9 billion has been used. No further products are in the immediate pipeline after Harvest’s forthcoming offering, but with the State Administration for Foreign Exchange having announced a total RMB50 billion for the latest round of RQFII products, it seems likely that more ETFs will be approved if the recently launched funds continue to prove a success.