As exchange traded funds (ETFs) steadily increase in popularity across Asia-Pacific and buck the worldwide trend to see a rise in trading in 2012, the region is ripe with potential for firms willing to innovate, according to BNY Mellon.
Rex Wong, managing director within BNY Mellon’s Asia asset servicing business, said: "The primary structural factors underpinning the growth of ETFs in Hong Kong are coming into place quickly. Foremost among them is the opening of China’s renminbi (RMB) qualified foreign institutional investor (RQFII) to non-Chinese asset managers. The creation of RMB-denominated ETFs will accelerate as regulators allow global fund managers into the market, bringing their expertise in structuring specialty financial products.
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"We expect developments on these fronts to spur the creation of a range of investment styles and options of China-focused ETFs in Hong Kong that will ultimately match the diversity of options that we see today in other ETF markets, catering to both institutional as well as retail interests.
"The most likely ETFs to emerge in the short-term are specialized equity funds, such as those comprising equities of a particular industry sector or geographic region, and fixed income ETFs. In the medium term, there is scope for a range of more exotic or niche products, such as real estate sector and commodity ETFs built around precious metals.
"The most important factor to promote more RMB-denominated ETFs is a more inclusive RQFII program. Recipients of RQFII licences have been the primary sponsors of exchange traded products that invest directly in China’s capital markets.
"The number RQFII licenses highly likely to be set to rise after the recent decision by the China securities regulatory commission to extend RQFII eligibility to non-Chinese asset managers, including Hong Kong-based subsidiaries of global fund houses. Based on conversations we’ve had, we expect the fund management industry to respond to the opening of China’s securities market and give a boost to Hong Kong’s ETF industry. It’s possible, for example, that a Hong Kong unit of an American or European fund house will get RQFII credentials by year’s end.
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By GlobalData"Another important factor driving ETF creation is the development of indices around which asset managers can structure new funds. With the recent launch of the CESC cross border index series by the China exchanges services company, a joint venture between the stock exchanges in Shanghai, Shenzhen and Hong Kong financial institutions will be able to construct RMB-denominated ETFs to give investors exposure to a regional basket of equities.
"Another likely innovation is sector-based ETFs that invest in a basket of Chinese equities from a specific industry sector, such as technology or industrial companies. These would offer investors concentrated exposure to industries they believe are poised to outpace broader market growth," Rex Wong added.
