Our Future ETF Market (Part 1)

The ETF universe in Hong Kong is very equity-heavy. Unlike the Hong Kong ETF universe, the Singapore ETF universe, which has roughly the same number of ETFs as Hong Kong, is much more diverse. As of writing, the Singapore ETF market contains 6 fixed income ETFs (only 2 in Hong Kong), 6 money market ETFs (only 1 in Hong Kong) and 6 commodities related ETFS (only 3 in Hong Kong).  

The reasons behind this phenomenon are somewhat simple. Most of Hong Kong investors have been big fans of equities for decades (although commodities have swept some of their hearts since 2006) and so fixed income funds and money market funds are like some weird elements on Mars to them. 

Apparently, this trend has no sign of reverse. The trading volumes of two fixed income ETFs – ABF Hong Kong Bond Index and ABF Pan Asia Bond Index Fund – remain low, despite the ongoing investor education taken place in Hong Kong.  

Home bias also plays a key role here. Hong Kong is one of the best international finance hubs, but Hong Kong retail investors are ironically far from global. Since the launch of Tracker Fund of Hong Kong, there are merely a few non-Hong Kong/China equity ETF offerings could succeed to gain lasting appeals from investors. Their relatively small fund sizes and low average trading volumes attest. Home bias reduces fund companies’ incentives to broaden their product ranges to the non-Hong Kong/China arenas and encourages them to launch more Hong Kong/China equity ETFs such as A-share sector equity ETFs.  

Equity investing is no guilt. However, many Hong Kong investors take it as a trading vehicle rather than a powerful tool of asset allocation. For instance, when western investors discuss about the pros and cons of the core-satellite approach which uses passive investments (such as index tracker ETFs) as core and a few actively managed portfolios as satellites, Hong Kong investors think about how to use ETFs to reap short-term upsides. As a result, limited ETF choices tie investors’ hand to use ETFs intensively for portfolio construction and absence of asset allocation mindset diminish fund companies’ incentive to launch more diverse products. Consequently, the ETF market will probably remain very equity-heavy.  

Not Rounded Enough

Major indexes are not well covered. For example, there are only three ETFs in Hong Kong mimicking US equity index including FTSE RAFI 1000 Strategy Index (an enhanced fundamental Index), NASDAQ-100 and MSCI Total Return Net USA Index. That means, unlike Singapore, major US equity market indexes such as Dow Jones Industrial Average and S&P 500 are not covered here. 

Also, Hong Kong investor can’t invest in anywhere with ETFs. For instance, there is no Australia equity and Latin America equity ETFs available for sale in Hong Kong, despite their growing popularity. Indeed, investors are able to add Latin America equity exposure with actively managed portfolios, but it is definitely a room for the Hong Kong ETF market to improve.