Hong Kong's exchange-traded fund (ETF) market is logging a record year thanks to the recent market rally, expanded inclusion in the cross-border Stock Connect programme and a series of new products, including Asia's first pegged to virtual assets.
Net fund flows of Hong Kong's exchange-traded product (ETP) market, which includes ETFs and leveraged and inverse products, surged 48 per cent year on year to HK$46.7 billion in the first 10 months, according to HKEX data. That brought the ETP market's total assets under management (AUM) to nearly HK$500 billion.
Average daily ETF turnover on the Hong Kong stock exchange hit a record high of HK$77 billion (US$9.9 billion) on October 8, riding on the stock market rally since Beijing unleashed its boldest stimulus package to end the property slump and put a floor on equities on September 24.
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The markets have been volatile as investors await more fiscal stimulus moves and observe the implementation of the measures in China.
"At times of volatility, investors tend to gravitate towards ETFs because maybe they don't have time to do stock picking, and they want to quickly react to market developments, market news and market movement, so they transact using ETFs," said Jean-Francois Mesnard-Sense, head of exchange-traded products at bourse operator Hong Kong Exchanges and Clearing (HKEX).
He added that ETFs accounted for more than 15 per cent of the overall cash market trading volume during the recent spike.
ETFs - funds that pool together a basket of securities and aim to offer returns that mirror the underlying market - are gaining traction in Asia, with mainland China being one of the fastest-growing markets.
Jean-Francois Mesnard-Sense, head of exchange-traded products at Hong Kong Exchanges and Clearing, pictured during a media roundtable on November 1, 2024. Photo: Aileen Chuang alt=Jean-Francois Mesnard-Sense, head of exchange-traded products at Hong Kong Exchanges and Clearing, pictured during a media roundtable on November 1, 2024. Photo: Aileen Chuang>
Tracker Fund of Hong Kong, which mirrors the city's benchmark Hang Seng Index, is set to become the most-traded security on the Hong Kong stock exchange this year, ahead of Tencent. Average daily buying and selling of the ETF reached HK$8.2 billion year to date as of October 22, compared with Tencent's HK$7.7 billion.
Single stocks used to dominate the top five securities in the city, but now ETFs have caught up thanks to growing investor interest, Mesnard-Sense said.
The ETF market's investor base is diverse, he added, including not only local and mainland Chinese investors through the Stock Connect scheme but also international investors from Southeast Asia, the Middle East, Europe and the US.
In July, 91 new ETFs joined the Stock Connect programme, pushing up trading volumes in the following months. Average daily turnover in the northbound channel, which allows foreign investors to buy mainland-listed A shares, peaked at 2.73 billion yuan (US$383 million) in September, 83 per cent higher than the previous month. The southbound channel, which enables investors in mainland China to buy select companies listed in Hong Kong, also rose 11 per cent to HK$3.12 billion in September.
ETFs were first added as eligible securities in July 2022 under the Hong Kong-mainland China mutual stock market access programme launched a decade ago.
The latest round of additions resulted from relaxation of criteria, including reductions of the daily AUM requirement and the benchmark weighting of the ETF, to boost fund flows and product innovation.
"Innovation and diversification are the two keywords to summarise the numbers of listings that we have had," said Mesnard-Sense.
More than 30 new ETPs were listed on the HKEX this year, including several US Treasury index ETFs, spot-cryptocurrency-token ETFs based on bitcoin and ether, and the CSOP MSCI HK China Connect Select ETF. The latter is a precursor of the connectivity between the Middle East and Hong Kong that ultimately led to Saudi Arabia's first ETF that tracks Hong Kong stocks, launched last week.
HKEX has rolled out initiatives to smooth trading frictions and enhance ties with international investors over the years, with the most recent being a plan to set up an office in Riyadh, the capital of Saudi Arabia, next year.
Also next year, HKEX is looking to digitise and automate the creation and redemption processes for relevant ETPs, subject to technical readiness and regulatory approval.
The move is expected to boost overall market turnover and liquidity, according to Mesnard-Sense.
"It has been a very positive year for ETFs in terms of innovation, with a lot of new products, market structures and expansion," he said. "I'm optimistic that we are on an upwards trajectory when it comes to ETF turnover."
HKEX is holding an ETF summit on Tuesday to celebrate the 25th anniversary of the first ETF in Hong Kong.
