Asia ETF Roundup (Industry) – February 2016

HK SFC Allowing for Leveraged/Inverse ETFs
On 5 February 2016, the Hong Kong Securities and Futures Commission (SFC) issued a circular setting out requirements for leveraged/inverse products structured as ETFs to be offered in Hong Kong. A summary of the requirements are as follows:

• They should not be named as “ETFs”, instead they must be named “Leverage Products” or “Inverse Products”, with an emphasis on the daily rebalancing aspect of these products by including the word “daily” in the product name – e.g. “[Issuer] [Index] Daily (2x) Leveraged Product” or “[Issuer] [Index] Daily (-1x) Inverse Product”.
• At the initial stage, the caps on leverage factor for these leveraged/inverse products are 2x and -1x respectively.
• At the initial stage, these products can only track liquid and broadly based non-Hong Kong, non-Mainland foreign equity indices.
• SFC will conduct a review 6 months after the launch of the initial batch to consider extending to liquid and broadly based HK equity indices.
• There are no plans to extend to mainland indices at this stage.

We welcome the broadening of product line in the Hong Kong ETF market. When it comes to leveraged/inverse ETFs, we would not recommend investors use these ETFs as speculative tools, but rather, use them as portfolio risk management or hedging tools—assuming they have a working knowledge of the potential issues associated with the daily resetting of these products’ leverage factors.

China QFII Reforms – Improving Quota System; Easier Repatriation
On 4 February 2016, China’s State Administration of Foreign Exchange (SAFE) announced a reform to the Qualified Foreign Institutional Investor (QFII) program with the following changes: 1. QFIIs are assigned with quota cap limits based on their assets under management, rather than a set amount; 2. QFIIs are now only required to seek further quota when they have reached their cap limit, rather than on a per application basis; 3. allows for daily repatriation (in-line with RQFII rules); and 4. Lock-up periods for all QFIIs will be shortened to 3 months from 1 year (previously only for asset owners, government institutions and open ended mutual funds), with a cap on monthly net outflows set at 20% of the QFII’s total onshore AUM.

MSCI Excludes 18 Hong Kong Stocks with High Shareholding Concentration
On 1 February 2016, MSCI announced its treatment with respect to Hong Kong’s high shareholding concentration securities after a consultation with the investment community. At the February 2016 Quarterly Index Review, MSCI excluded 18 securities from the MSCI Global Investable Market Indexes (GIMI) which have high shareholding concentration notices issued by the Hong Kong Securities and Futures Commission (SFC) in. These 18 securities were constituent stocks of the MSCI China Index, the MSCI China Small Cap Index or the MSCI Hong Kong Small Cap Index.

Press release of the consultation conclusion can be found here and the list of affected stocks can be found here.

RQFII ETF Watch – Net Inflows in February Totaling Rmb 1.1 billion

• In February, RQFII ETFs recorded estimated net inflows of Rmb 1.1 billion (4% of beginning and ending AUM). This compares to Rmb 2.3 billion of estimated net outflows in January. For the year to date, total net outflows are estimated at Rmb 1.2 billion.
• The majority of the net inflows during the month came from the CSOP FTSE China A50 ETF (82822 & 02822), estimated at Rmb 1.1 billion.
• The largest A-Share ETF by AUM in Hong Kong, iShares FTSE A50 China Index ETF (02823) recorded net outflows in February, estimated at Rmb 1.4 billion. This compares to estimated net outflows of Rmb 1.8 billion in January. For the year to date, total net outflows from the iShares FTSE A50 China Index ETF are estimated at Rmb 3.2 billion.

New Launches and Listings

KB Lists a Strategic-beta ETF in Korea
On 2 February 2016, KB Asset Management listed a strategic-beta ETF on the Korea Exchange, namely the KStar V&S Select Value ETF (A234310). This ETF tracks the FnGuide Select Value Index, which is composed of common stocks listed on KOSPI and KOSDAQ.

BMO Lists 4 ETFs in Hong Kong
On 18 February 2016, BMO Global Asset Management listed four ETFs on the Stock Exchange of Hong Kong, namely the BMO NASDAQ 100 ETF (03086), the BMO MSCI Asia Pacific Real Estate ETF (03121), the BMO MSCI Japan Hedged to USD ETF (03160) and the BMO MSCI Europe

Quality Hedged to USD ETF (03165). These ETFs track the NASDAQ-100 Index, the MSCI AC Asia Pacific Real Estate Index, the MSCI Japan 100% Hedged to USD Index and the MSCI Europe Quality 100% Hedged to USD Index, respectively.

The listings of these ETFs put the total number of ETF listings in Hong Kong at 164 (135 ETFs and 29 dual counters) and the total number of BMO ETF listings in Hong Kong at 7.

Hanwha Lists a Strategic-beta ETF in Korea
On 24 February 2016, Hanwha Asset Management listed a strategic-beta ETF on the Korea Exchange, namely the ARIRANG SMARTBETA Quality Balanced ETF. This ETF tracks the WISE-KAP Smartbeta Quality Conservative Balanced Index, which is comprised of a pre-defined weight of equity exposure (30%), as represented by the WISE SmartBeta Quality Index, and a pre-defined weight of bond exposure (70%), as represented by KAP Bullet Total Return Index.

The listings of this ETF and the KStar ETF put the total number of ETFs in Korea at 205.

List of ETFs Launched in February 2016